In this day and age there are so many different ways to pay for things, many of which do not involve handling cash or writing a check at all. A lot of purchases can be handled with a card or digitally. Two of the most common methods for making payments are using a prepaid card, or a credit card. With both being card-based methods of payment though, it can be a little confusing to understand the difference. Luckily, with a little bit of research the difference between these two kinds of plastic payments becomes clear pretty quickly.
What is a Credit Card?
A credit card is a payment card that is given to a user (aka cardholder) that allows them to pay for goods and services based on their promise to repay the card issuer the amount that they spent in addition to any other agreed upon charges. These payments are usually made by the cardholder to their card issuer on a monthly basis. Credit cards can also be used as a way to get a cash advance when you are in serious need of extra funds to pay for something that came up unexpectedly like a hospital stay or a vehicle repair.
What is a Prepaid Card?
A prepaid card is a card that looks like a credit card, can be spent like a credit card, but is not a credit card. Instead, the way it works is that you load money onto it from your own pocket book, and then use the card until it has no more money on it. People often use these in order to avoid spending money that they do not have. Because of this, cardholders do not have to worry about any overdrafts or incurred debt that they cannot afford to pay back to a card issuer.
Prepaid Cards vs Credit Cards
Though credit cards and prepaid cards share some similarities, there are some noticeable differences that you will want to keep in mind when deciding on one or the other.
There are limits to what you can do with a credit card or a prepaid card, though in different ways. A credit card will usually have a maximum amount of money they will let you borrow before they cut you off. Similarly, a prepaid card only has so much money on it before you get cut off. The difference however is that the money you get from a prepaid card is money that you had already. A credit card allows you to borrow money you did not already have, but in return you have to pay it back plus interest and other fees.
Another difference between credit cards and prepaid cards is that a credit card, when paid off on time (but especially early), can help you build up your credit score. Having a great credit score can make you look like a better candidate for a great mortgage or car loan from a bank when the time comes for you to make such a large purchase. A prepaid card, on the other hand, will not do this. The reason for this is because a prepaid card is money you already had to begin with. You are not borrowing funds from anyone, and thus have nothing to pay back. When you have nothing to pay back, there is nothing for a card issuer to report to a credit reporting agency.
Credit card companies are obligated by federal law to tell you right from the get-go about any and all fees that come along with using their services, that way nothing blindsides you and you do not end up in a financial pit that you will never be able to dig yourself out of. However, such laws do not extend to the companies who issue prepaid cards. According to a study done by CreditCards.com in 2016, 7 out of 10 prepaid card companies did not fully disclose their fees to their customers before they had bought into them.
If by some unfortunate chance your credit card gets stolen, you could be in a lot of financial trouble if you do not move swiftly to shut down the fraudulent spending. A thief could spend your entire line of credit and leave your financial identity in a real mess that could take several years to recover from. With a prepaid card however, all that can be stolen is the money that is loaded onto your card. Because prepaid cards are not linked to your check or savings account, you do not have to worry about a thief being able to get any further beyond what is loaded on the card.