US Prepaid Cards Compared

Published on 14 July 2012 by Raffick Marday

Prepaid Credit Card US

A prepaid credit card is not a credit card, as no credit is offered by the card issuer: the card-holder spends money which has been “stored” via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand Visa, MasterCard, American Express and can be used in similar ways. After purchasing the card, the cardholder loads it with the amount of money and then uses the card to spend the money. Prepaid cards can be issued to minors (above 13) since there is no credit line involved. The main advantage over secured credit cards is that you are not required to come up with $500 or more to open an account.

With prepaid credit cards you are not charged any interest but you are often charged a purchasing fee plus monthly fees or a transaction. There can be other fees also usually apply to a prepaid card.

Prepaid credit cards are sometimes marketed to teenagers for shopping online without having their parents complete the transaction. Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the Financial Consumer Agency of Canada describes them as “an expensive way to spend your own money”.

The agency published a booklet, “Pre-paid cards”], which explains the advantages and disadvantages of this type of prepaid card inclusing Features as well as convenient, accessible credit, credit cards offer consumers an easy way to track expenses, which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes.

A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user’s account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user) to be paid to the merchant. It is also different from a charge card which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to ‘revolve’ their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the ISO 7810 standard.

Prepaid Credit Cards in the USA

A prepaid credit card is not a credit card, as no credit is offered by the card issuer: the card-holder spends money which has been “stored” via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand Visa, MasterCard, American Express and can be used in similar ways. After purchasing the card, the cardholder loads it with the amount of money and then uses the card to spend the money. Prepaid cards can be issued to minors (above 13) since there is no credit line involved. The main advantage over secured credit cards is that you are not required to come up with $500 or more to open an account.

What can a prepaid card be used for?

Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks (such as rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or credit card cashback). Some countries, such as the United States, the United Kingdom, and France, limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer’s credit card being lost or stolen.

In recent times, credit card portfolios have been very profitable for banks, largely due to the booming economy of the late nineties. However, in the case of credit cards, such high returns go hand in hand with risk, since the business is essentially one of making unsecured (uncollateralised) loans, and thus dependent on borrowers not to default in large numbers.

Costs Credit card issuers (banks) have several types of costs: Interest expenses Banks generally borrow the money they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If for example the card issuer charges 15% on money lent to users, and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 10% on the loan.

This 5% difference is the “interest expense” and the 10% is the “net interest spread”.

Operating costs This is the cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics, to mailing the statements, to running the computers that keep track of every cardholder’s balance, to taking the many phone calls which cardholders place to their issuer, to protecting the customers from fraud rings. Depending on the issuer, marketing programs are also a significant portion of expenses.

The merchant’s side

For merchants accepting credit cards a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorised, regardless of whether the consumer defaults on their credit card payment except for legitimate disputes and can result in charge backs to the merchant. In most cases, cards are even more secure than cash, because they discourage theft by the merchant’s employees.

For each purchase, the bank charges a commission (discount fee), to the merchant for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalised or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes.

Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium. In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card’s PIN code for identification, and in that case showing an ID card is not necessary.

Grace Period

A credit card’s grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 30 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met.

Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charge(s) incurred depends on the grace period and balance, with most credit cards there is no grace period if there’s any outstanding balance from the previous billing cycle or statement (ie. interest is applied on both the previous balance and new transactions).However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

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