“How do prepaid cards work?” is a question I have been asked hundreds of times in my fifteen years of working as a money manager, financial advisor and a college financial aid consultant. In fact, that’s the question I get asked most in relation to online college education. The short answer is: in a general way.
You see, prepaid debit cards are almost like debit or prepaid credit cards in some ways. For example, if you do an online purchase with your card, it will be deducted from your account the same day or the next business day. And as long as you make your monthly minimum deposit, your credit card is FDIC insured and you can use it anywhere Visa is accepted.
Where they differ is that unlike a credit card where if you miss a payment you’re stuck with the bill, a prepaid card allows you to simply load money onto your account when you’re not using it. Thus, unlike a credit card, you don’t have to worry about repaying your bills. If you use your card for something, it’s on your account until you make your next payment.
So the next time you’re wondering, “how do prepaid cards work?” refer back to my main thesis in this article:
There are three basic types of cards. And the two most common types are reloadable and unsecured prepaid. If you understand the differences between these three types of cards, you’ll understand how they differ. And of course, if you understand the differences between these three types of cards, you’ll be able to answer the “how do prepaid cards work?”
So what types of cards are there? The most popular type of prepaid card is unsecured, which means you deposit money into your account which can be withdrawn at any time at the issuer’s discretion. There are typically no monthly minimum deposits required and there is no monthly service charge for this type of card.
The easiest way to get started with an unsecured card is to buy a “starter” card. These cards have low minimum deposit requirements and you can use them with the same ease as a credit card. The best part is that you can even make purchase online with these cards.
It is important to remember that starter cards have little to no interest rates attached to them and so you need to be prepared to deal with a large potential cost of early withdrawal penalties. The interest charges associated with the higher interest balance will be much higher than if you had purchased a traditional credit card.
Still, it’s not that hard to find these starter cards, because they are available online and at many banks nationwide. All you need to do is find the right online merchant account (which will typically carry fees for online credit cards) and you’re ready to load up.
The best way to pay down your balance is to only make purchases with your card that have low interest rates. And by making only those types of purchases, you can keep the monthly payment amount low.
Prepaid cards can be used by everyone regardless of age or income level. Of course, the younger the person, the higher the interest rate will be. In addition, some cards charge a transaction fee of a few dollars for each transaction while others don’t.
So, whether you’re a student or a parent who wants to keep their child out of trouble, know the basics of how to do prepaid cards work and then make informed decisions based on those basic facts. Whether you’re the best person to handle your child’s finances, or you’ve just graduated from college and have never dealt with an actual credit card, a prepaid card can be very beneficial to you.