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How do prepaid cards work. Pros and Cons of having one

Tamara Avatar By: Tamara | Last updated February 13, 2019

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Prepaid cards have become very popular during these last couple of years. Around 50% of all Americans apply for one every year, so in case you’re wondering what exactly are they and why should you get one, read further.

Prepaid cards are pretty similar to debit cards. They can easily be purchased online, over the phone or from the bank.

What are they used for? Well, prepaid cards let you buy or pay for basically anything you want, just like you would regular cash: from groceries to gas for your car, hotel rooms, airplane tickets and so on. They look just like a regular credit card, only they work by you depositing a certain amount of money on them, money that you can then spend on anything you want. Prepaid cards also have a 16 digit number, magnetic strip and chip. You can spend exactly what you put on it and when you used up all your deposited money, you can’t use it anymore, until you reload it again (if the type of prepaid card you have allows you to reload it). Prepaid cards don’t have any limits on them like credit cards, you spend exactly how much you load on your account. There are also no late payments or interest involved. Even if you have a bad credit, you can still apply for one and use it, everyone can own one.

Types of prepaid cards

There are several types of prepaid cards you can choose from. Here are the most important of them:

Non-reloadable prepaid cards. They are also known as gift cards and they can only be used until the value on them is used up. Once there’s no more money on them, you can’t reload them or use them again, they are disposable.

Reloadable prepaid cards. As you’ve probably guessed it, these cards can be reloaded with more money, once you’ve used it all up. You can repeat the whole thing over and over again and redeposit money on them, even in the form of checks, in some cases.

Open-loop prepaid cards. These types of cards come with a network logo on them (such as Visa, American Express, MasterCard and so on) and can be used anywhere those brands are accepted.

Closed-loop prepaid cards. Although most of them don’t come with a logo, they can only be used in specific places, such as a certain group of stores.

Payroll prepaid cards. These are cards that you receive from your employer for getting your paycheck on them.

College ID cards are also a type of prepaid card issued by colleges and they can be open loop or closed loop.

There are several advantages to using prepaid cards:

  • They are convenient. You can get them in a variety of ways, you don’t necessarily have to go to a bank (they can be bought from banks, via phone, online, from specific stores, etc.)
  • Children can also have one, you don’t have to be 18 to get one
  • You don’t need a good credit, anyone can apply for a prepaid card, as long as they can be identified
  • There are no interest rates to worry about
  • It takes little time and money to apply for one
  • They are more secure than always carrying cash on you
  • They’re not attached to your bank account which protects you from unwanted complications (fraud, etc.)
  • You can reload them very easy and fast, online and by phone

Regarding the drawbacks of having a prepaid card, the biggest one would be the fact that they do come with a lot of fees (the purchase fee, monthly or annual administration fees, reloading fees, inactivity fees in some cases – if you don’t use them for a longer period of time, fees for using the ATM or for foreign transactions. Make sure and carefully read all the conditions before you apply for any card, to choose the best option for your needs.