Prepaid debit cards function like regular credit cards but there are actually major differences between these two types of plastic cards. In this article, let us discuss the basic facts that you need to know about reloadable prepaid debit cards.
No Credit Line. First, a prepaid debit card doesn’t provide the cardholder with a credit line. In order to use the card for purchases or bill payments, the cardholder must have a checking account on file that they deposit the money into. When the funds run out, the cardholder must make a new deposit or “reload” cash to use the prepaid card for new transactions. Hence, the name reloadable prepaid debit cards.
No credit check. Unlike credit cards, issuers of prepaid debit cards do not check individual credit history or credit scores. As long as you have a valid checking account, you can obtain a prepaid card with no difficulty. This is why, prepaid cards have been ideal for people who need the convenience of credit card payment but cannot get approved for a regular credit card because of bad credit or not having credit history at all. Recently, more and more people have started to use debit cards as a way to stay on budget.
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No interest rate. When you pay with your prepaid debit card, your bill is automatically paid off using the funds in your account. This means you do not have to option to defer your payment or pay at a later time. The good thing about this is that you do not need to worry about paying additional interest rate fees.
Transactions fees. While there is no interest rate, debit cardholders must be aware of transaction fees. Each issuer has different fees. Before you sign up for a new card you need to read the fine print and know what kind of fees the card issuer is charging. Also sometimes they will waive fees if you set up your account on automatic deposit or tie it to your paycheck. Just keep in mind the cost will vary depending on the issuer.
Annual fees. Like regular credit cards, prepaid debit cards also carry annual fees to keep the account active. The fee can range from $50 to $100 or more, depending on the issuer. Not being able to pay the annual fee on time can result to deactivation of the debit account. Thus, a prepaid cardholder needs to be conscious about his/her payment due dates.
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Can You Rebuild Your Credit? In the past, issuers of debit cards did not report payments to the credit bureaus. Today however, there are some prepaid debit cards that report your activity or card usage to the major credit bureaus (Experian, Equifax, TransUnion). So if you have no credit or bad credit they can be a great way to start building or improving your credit. Keep in mind that NOT ALL DEBIT CARDS OFFER THIS FEATURE. So make sure you read the fine print. The cards that do offer a “credit builder” feature sometimes charge a monthly fee for them to report your activity to the credit bureaus.
Limited protection against liabilities. Credit card issuers provide their customers with protection against unauthorized charges. Nevertheless, prepaid debit cardholders may not enjoy such protection against liabilities. Some prepaid debit card issuers may give protection but only if the cardholder reports the unauthorized charges 2 days after the transaction was made. If you fail to report in time, then there is no way to bring back your lost money.
This is why its so important to keep an eye on your debit account. Especially if you are doing any online shopping. Its very difficult to impossible to get money back once its out of your account. That is why in recent years more and more scam artist have been targeting debit card users.