What's the difference between a credit card and a prepaid card? A credit card is a powerful financial tool which basically lets you get an instant loan and pay most of the loan off whenever you choose to. Using a credit card also helps you to build your credit history, and offers many other benefits. A prepaid card on the other hand does not let you spend money on credit, you have to add money into your card account and the money you add is what you use to make payments.
What is a prepaid card good for? If you prefer not to live on credit, then a prepaid card is the obvious choice. You get the benefits of a credit card like easy cashless payments, limited liability and often even rewards, but without spending someone else's money.
The prepaid card also wins if you don't want your spending behavior to affect your credit history. Since prepaid cards do not actually give you credit (you are using your own money) your spending and payments behavior is not normally reported to the credit bureaus. You also won't have to show proof of income or have a credit history in order to get one.
If you want to use a prepaid card to build your credit score, there are a few prepaid cards on the market that include credit reporting as an extra feature (some READYdebit prepaid cards include these features). However, if building credit is your goal, you will accomplish that a lot faster using a secured credit card. Like a prepaid card, you can get a secured card without any credit history just by putting down a deposit, but a secured card actually gives you credit, and reports your spending and repayment behavior to credit bureaus.
If you have bad credit but can't afford to put down a deposit for a secured credit card, then a prepaid card is your key to enjoying the perks of a credit card without tying up your cash in a deposit.
What's the difference between a prepaid card and a debit card? Because a debit card is linked to your bank account, if your card information is stolen then a criminal may be able to access your account. By using a debit card to make payments at retailers you may be putting your bank account at risk. A prepaid card provides a much safer alternative because it isn't linked to your checking or savings account, and nobody can steal more money than what you load onto your card.
On the other hand, if your credit card is stolen, the guilty party could spend your entire line of credit if you don't notify the bank quickly. You will have a maximum of $50 liability for fraudulent transactions when you report the credit card theft promptly (proving this can be difficult if the thief is a roommate or family member). Although many credit cards offer $0 liability. A prepaid card is also a safe option as far as cards go, as you get the same $50 liability for fraudulent transactions that you get with a normal credit card (many issuers offer $0 liability) and you get to choose how much money you keep on your card at any time.
Is a prepaid card a better option than a credit card? A prepaid card is a great stop-gap tool if you just need a card to make payments with. Many prepaid cards offer similar benefits to what you find on basic credit cards, while letting you make your payments up front and avoid debt. However, if you have good to excellent credit and are prepared to diligently pay your balance in full every month, you may find a credit card much more rewarding. Good credit cards offer much higher rewards or cash back than you will find on any prepaid card, and come with perks and benefits that can save you a lot of money.
Here are some of my favorite rewards credit cards: