The term prepaid card is applied to various cards, including stored-value cards, prepaid debit cards and prepaid “credit” cards.
In most jurisdictions, prepaid cards can be issued to minors since there is no line of credit. It should also be noted that stored-value cards tend to be anonymous and not tied to a specific person, although there are exceptions.
For a person with a bad credit score, using prepaid cards can serve as an alternative to the secured credit card. A secured credit card will typically require a deposit of several hundred USD upfront, making them unavailable for some.
Before you decide to use any prepaid card, make sure to find out about any fees. Some prepaid cards will charge you both a monthly fee and a purchasing fee for each purchase. This can quickly become a very expensive way of spending your own money without getting the benefits that comes with having access to credit and building a good credit score.
Prepaid credit card
Although we often use the term ”prepaid credit card”, a prepaid card is not a real credit card since it offers no credit. However, it is possible to create a card that offers the two options simultaneously, i.e. you can prepay a certain amount in advance and when that amount is used up you have a line of credit to fall back on. Most cards known as “prepaid credit cards” do not work in this manner, they are simply prepaid cards without any credit option tied to them.
Examples of companies that are chiefly known for their credit cards and charge cards but that also offers prepaid cards are Visa, MasterCard and American Express. Prepaid cards will usually not require a PIN, unless the payment is processed via Chip & PIN technology. Most prepaid “credit cards” have an upper limit for how much money you can prepay.
Prepaid debit card
Unlike a stored-value card, the prepaid debit card is linked to some sort of account.
There are prepaid debit cards that are available even for people who can’t (or wont) have a bank account. Large companies such as Visa and MasterCard offers prepaid debit cards, which means that they are accepted in many different places, from convenience stores to hospitals. MasterCard has even teamed up with Comerica Bank and the U.S. Treasure Department to create the Direct Express Debit Mastercard, a debit card that the federal government can issue payment (such as social security) too.
Some issuers of prepaid debit cards caters to those who would otherwise use a service like WesternUnion to wire money to family members residing in another country. Using a prepaid debit card can significantly reduce the transaction costs of money remittance. In many cases, it is also safer for the family to have a debit card instead of having to visit a wire transfer office and receive cash in hand.
A stored-value card is a payment card where the monetary value is stored on the card itself. This sets it apart from debit cards, prepaid cards and similar where an external account of the monetary value is maintained by a financial institution.
An big advantage with this type of cards is that they normally do not require telecommunication facilities to work. In a situation when for instance the Visa or MasterCard network is down, you can still make payments using your stored-value card. The transaction is processed offline and there is no need to wait for confirmation from any financial institution.
Information about the monetary value of a stored-value card is usually stored on the card in the form of binary-coded data that can be accessed using a magnetic stripe embedded in the card or by using radio-frequency identification (RFID) technology. For some stored-value cards that are used to pay for phone calls, you enter a code number printed on the card into a telephone using the numeric keypad.
Stored-value card are typically anonymous, i.e. not issued to a specific account holder. They tend to be limited to small payments and have an upper limit for how much value they can hold at once. Stored-value cards are becoming an increasingly popular form of payment for public transportation fare, phone calls, vending machine products and similar.
A downside with most stored-value cards is that since the value is stored on the actual physical card, they can not be used when shopping online, over the phone, etc since they are useless for “card not present” transactions.
Examples of stored-value cards
- Mondex is a stored-value card issued by MasterCard. It can store up to five different currencies. Remote transfers of funds are possible via an enabled mobile phone. A Mondex card can be programmed to perform secondary function, e.g. to be a building access card.
- Geldkarte is a stored-value card used in Germany. It operates on an offline smart card. The Geldkarte is typically used to make small payments, e.g. for parking, for public transport or to purchase items from vending machines. Funds are loaded onto the Geldkarte at special charging machines or at ordinary ATMs.
- The Octopus is a stored-value card used in Hong Kong. It was originally launched as a payment method for Hong Kongs mass transit system, but is now accepted by all public transport in Hong Kong as well as many stores, restaurants, parking meters, car parks, service stations and vending machines.