Differences Between a Credit Card and a Prepaid Card
Owing to the increasing prices of goods and services around us, many people are turning to credit cards to deal with the shortage of funds. But that is not the only option for customers as prepaid cards are also becoming a popular option for instant transactions.
Very often people confuse credit and prepaid cards as the same. However, both are different from one another in many aspects.
This blog will take you through the differences between credit cards and prepaid cards comprehensively.
What Are Credit Cards and Prepaid Cards?
A credit card is a plastic card that allows users to instantly borrow funds for purchasing goods or services. In India, Credit cards are mostly issued by banks with the exception of SBI credit cards and American express being Non banking entities issuing credit cards. As you make payments with credit cards, your debt or outstanding amount increases. You must repay this amount by the end of the grace period to avoid interest obligations.
You can repay the outstanding amount as a small EMI throughout the tenure of credit card debt. On repaying the EMI, your outstanding amount and interest rate on your credit will decrease consistently. This also boosts your credit score and improves your image to lenders.
Although prepaid cards look pretty much like credit cards, there is a basic difference between the two. As the name suggests, prepaid cards come with special accounts that you need to refill before making any transaction. After every purchase using a prepaid card, the amount is deducted from your prepaid account until it reaches zero.
There are two types of prepaid cards- reloadable and non-reloadable cards. Reloadable prepaid cards are those that you can refill every time their balance exhausts. In contrast, non-reloadable prepaid cards do not allow you to use a refill once their balance exhausts.
Let’s take a look at the differences between credit cards and prepaid cards.
What Are the Differences Between Prepaid Cards and Credit Cards?
|Credit Cards||Prepaid Cards|
|Transaction through credit cards includes borrowing money from banks and other lending institutions.||Prepaid cardholders do not need to borrow funds from any institution.|
|One must repay and reduce the outstanding amount before opting for a new credit.||Users must refill the card before resuming any transaction with a prepaid card.|
|Banks and NBFC set a limit beyond which you cannot spend using a credit card.||The amount you can spend depends solely on how much you fill your prepaid card with.|
|You can use credit cards with any business or merchant to make a transaction.||Prepaid cards are linked to certain businesses and merchants only.|
|This offers a secured mode transaction as a credit card is linked with your PAN, phone number and email ID.||Prepaid cards usually do not carry such security during transactions. Any person with this card can use the prepaid amount here|
|Credit card transactions can affect your credit scores both positively and negatively.||Transactions with prepaid cards do not boost or lower your credit score.|
What Are the Benefits of Credit Cards?
The points below highlight the notable benefits of credit cards.
- They are a great way to maintain and grow your credit reports and boost your buying power.
- You do not need to repay the entire outstanding amount at once. With credit cards, you can opt for the EMI option and repay them. With this, you can distribute your debt into smaller amounts and repay them periodically.
- Credit cards offer a high degree of flexibility compared to other payment methods.
- You can receive reward points for frequent and smart usage of credit cards. You can redeem these points to earn cashbacks and other rewards.
- They are a comparatively more secure mode of transaction.
What Are the Drawbacks of Credit Cards?
Here are some of the drawbacks of using credit cards for any cardholder.
- When you fail to pay debts on time, the interest rate will increase.
- Defaulting on any credit card payment can bring down your credit score.
- Banks and NBFCs will not issue credit cards if you have a poor credit score. They might consider you a risky investment.
What Are the Benefits of Prepaid Cards?
The following are the benefits of using prepaid cards:
- Employees can transfer their salary from their savings accounts to prepaid cards.
- Users of a prepaid credit card can make transactions without incurring any debt to banks or other lenders.
- Prepaid cards can function as gifts for weddings and various festivals in India.
- These cards work well for individuals who do not wish to participate in the credit card system to purchase goods and services.
- Prepaid card users can also make online payments.
- Some prepaid cards come with an ATM cash withdrawal facility.
- Transactions using prepaid cards do not negatively or positively affect your credit score.
What Are the Drawbacks of Prepaid Cards?
The points below highlight the disadvantages of prepaid cards for an individual:
- One has to pay high fees and additional charges to maintain and activate the card.
- Prepaid cards do not have the high privacy and security features that debit and credit cards carry. Therefore, anyone with a prepaid card can use the money from this account.
Although credit and prepaid cards look almost the same, they have basic differences in their nature and usage. A credit card allows you to take debts from lending institutions whereas you can use prepaid cards as gifts and for small purchases. For building your credit score and getting access to exclusive rewards, credit cards are a better choice.
Frequently Asked Questions
Are prepaid cards and debit cards different?
Each prepaid card is linked to a different prepaid card account whereas debit cards are linked to your savings or any other bank account. Also, you can spend only the pre-loaded sum of money with a prepaid card. On the other hand, you can spend as much money available in your bank account with a debit card.
What are the different types of prepaid cards?
The types of prepaid cards are as follows:
Semi-open loop cards
Open looped cards
Closed looped cards
What is the maximum spending limit for credit cards?
Every credit card comes with a credit limit beyond which you cannot spend. However, this limit varies between lenders. They determine the limit based on your credit behaviour and monetary situation.
What are open-looped prepaid cards?
Open-looped prepaid cards are those that carry logos of networks of their affiliation. As a result, you can operate these cards at certain banks. Furthermore, as open-looped cards, all merchants and stores accept them in every location.