If you’re thinking about using a prepaid credit card for purchases, make sure you know the facts first. This article will go over the obvious–and not so obvious–truths about prepaid cards.

1. The first thing to understand about prepaid credit cards is this: although they look like and act like credit cards, they aren’t. Prepaid cards are more like debit cards because they draw from your deposit of cash. As you spend money, it’s automatically deducted from your balance. When you run out you need to deposit more. These cards are, however, associated with major networks like American Express and Visa, allowing you to use them for almost anything. 

2. Prepaid cards are often used by people as an alternative to a bank. These cards allow anyone to do things that require a credit card, like booking a hotel, without the need for a checking account. Paychecks can even be deposited directly onto the card with the use of an account number and routing number.

3. These cards can also be ideal for people with bad credit that can’t get a bank account or traditional credit card because there’s usually no credit check required. Also, because you can’t spend more than your balance, prepaid cards offer a great way to learn responsible spending. The main downside for people that want to rebuild their credit is this: prepaid credit cards aren’t tracked by the credit bureaus at all.

4. Something many people aren’t aware of is the features offered by many prepaid cards. While all allow you to make purchases, many allow you to withdraw cash from an ATM with a PIN, pay bills online, authorize checks to be issued, and even set up recurring bill payments.

5. Reloading is also very simple with prepaid cards because you can do it four different ways. Either transfer money from a bank account, have your paychecks direct-deposited onto the card, transfer money from Paypal or simply reload it at a retail store like Wal-Mart.

6. Prepaid cards can also be a great way to budget and manage money, particularly for people that don’t have a bank account. They allow you to save money on money orders and keep you from spending more money than you have available.

7. Probably the biggest benefit to prepaid cards that people aren’t aware of is the protection they offer. Many prepaid credit cards offer the same protections as standard cards, including theft and loss protection.  If you register your card and its lost, you can often have the original balance restored on a new card. The amount on your prepaid credit card is also FDIC-insured up to $250,000.

8. Unfortunately, there are a number of downsides to these “credit cards.” When you purchase a prepaid credit card, expect many fees, which is how the issuer makes money. Most cards charge a one-time setup fee and you’ll often be charged for purchases, adding more money, withdrawing at an ATM, and checking your balance online. Other cards often charge monthly maintenance fees whether you use the card or not. The good news is that fee systems vary by card. Some offer fee-free transactions while others waive all fees if your balance is high enough or if you direct-deposit your paycheck. Make sure you always read the back of the package before buying a prepaid credit card so you understand fully the fees associated with the card.

 As you can see, there are a number of things that make prepaid  credit cards beneficial. They help control spending and can be a great money-saving tool for people that don’t have a bank account. They also help people that need a credit card to rent a vehicle or stay at a hotel. Just be aware of the potential downsides. Prepaid credit cards aren’t reported to the credit bureaus and won’t improve credit. They can also have a high number of fees associated with them that can add up if you’re not careful. If you’re thinking about buying a prepaid card make sure you read the terms of service and understand the fee system completely to avoid having your balance eaten up.

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