The term “prepaid credit card” is basically nonsensical. Prepaid cards are not credit cards. They do not provide lines of credit, and information about their use is not reported to the major credit bureaus. Still, they are widely referred to as prepaid credit cards and, in a lot of cases, are mixed in with credit card offers —facts which beg the question: Why? Why when you type the word “prepaid” into a search engine, does “prepaid credit cards” pop up as a suggestion instead of “prepaid cards?”
Many people simply don’t know exactly what a prepaid card is, and since it’s plastic, they just lump it into the credit card family. However, a prepaid card is basically just a debit card for people who do not want a checking account from a traditional bank or cannot qualify for a checking account because of mistakes made in the past—bouncing checks, for example. Before using a prepaid card, money must be loaded through direct deposit or at a retail location, and obviously there is no bill to pay at the end of the month. Prepaid cards can be used to pay bills, deposit paychecks, make purchases and withdraw money from ATMs. In short, they can do anything a checking account can—with the lone exception being the ability to write paper checks.
Prepaid cards could also, in theory, provide lines of credit. They’ve even been offered with such a feature in the past. However, none of the prepaid card options currently on the market provide capabilities remotely similar to those of a credit card. Referring to a prepaid card as a prepaid credit card is simply misleading. Interestingly, therein lies the main reason for this misnomer.
Consumers are confused about what a prepaid card is precisely because issuers want them to be. Prepaid card issuers foster misunderstanding by listing their products as “prepaid credit cards” on search engine results. They do so because, frankly, there’s no better marketing strategy than to create the illusion that their products provide the best of both the prepaid and credit card worlds: guaranteed approval, low fees, no security deposit, a line of credit and the ability to improve credit standing. Simply inserting the word “credit” between “prepaid” and “card” implies the combination of these desirable features and makes for an appealing spending option for people with bad or limited credit.
This isn’t to say that prepaid card issuers keep the true nature of their cards a secret. None of their products are listed as credit cards on their actual websites and the distinction between a prepaid card and other types of spending vehicles is often made clearly in the fine print.
For instance, the “Terms and Conditions” page for Account Now—one of the most popular prepaid card issuers—includes the following information: “The Card is not a gift card, nor is it intended to be used for gifting purposes. The Card is not a credit card.”
However, this is clearly often too little, too late as prepaid cards are perceived to be credit cards by many. They are not though, and consumers must remember that.