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Credit card companies make money by extending credit and facilitating transactions. They charge interest and fees for these services.

Using a credit card as a method of payment requires an intricate process happening behind-the-scenes when you buy your morning coffee or make an online purchase in seconds. Read one to learn more about this and how credit card companies make money.

Types of Credit Card Companies

You might be keenly aware that you pay your monthly credit card bill to the bank or financial institution that approved your credit card line. However, there are other credit card companies involved in the payments process.

Credit Card Issuers

The credit card issuer is the entity that provided you with your credit card. Major U.S. banks, credit unions, and other financial institutions issue credit cards directly to consumers. Some examples include Chase, Capital One and Pentagon Federal Credit Union.

Credit Card Networks

Credit card networks, also called card associations, partner with credit card issuers to act as a middleman that communicates between your bank and the merchant’s bank. Visa, MasterCard, American Express, and Discover are the four major U.S. card networks.

Some networks also act as a card issuer, offering their own credit card products to consumers. The credit card network also typically determines transaction interchange rates (more on this later), relays whether a charge was approved or declined, and identifies potentially fraudulent activity on a credit card.

Credit Card Processors

As its name states, a credit card processor is the company that actually processes the transaction between the issuing bank and the receiving bank. Some examples of credit card processors are Stripe, PayPal, Square, and Elavon.

Additionally, some credit card processors ensure that the merchant and transaction are secure and compliant under the Payment Card Industry Data Security Standard (PCI DSS).

How Credit Card Companies Work

All of the types of credit card companies above work in unison so you can successfully pay for goods and services using a credit card as a cashless payment option. There’s a lot of back-and-forth communication between the three types of credit card companies after you provide your credit card to a merchant.

The process starts with obtaining authorization, which the merchant requests from its payment processor after a customer swipes or taps their card to pay. The card processor then submits your credit card information and transaction details to the card network. Your card’s credit card network routes this information to your issuing bank. The issuing bank either approves or denies the transaction based on your available credit and the status of your account.

If approved, your bank sends the approval to its partner credit card network. The card network then communicates the approval to the merchant’s bank. The merchant’s bank relays the approval to the merchant, so you can finally walk away with your purchase or close the transaction.

Although you walked away with your item or completed the online checkout process, the merchant doesn’t get your payment in their account instantly due to how credit cards work. Instead, the merchant goes through a separate process afterward to settle and receive funds for the authorized transaction. The transaction and payment details of transactions are communicated through the same channels that were used for authorization, involving the credit card network and issuing and merchant banks.

After the issuing bank draws the funds from your credit card account, it transfers the amount to the merchant’s bank, but withholds an interchange fee.

Recommended: What Is a Charge Card

How Credit Card Companies Make Money From Cardholders

Credit card companies tack on various credit card charges as part of their business. Below are three ways that credit card companies make money from their customers and from each other.

Interest

As you use your credit line, credit card interest charges apply when all or a portion of your statement balance rolls into the following month. This interest is expressed as an annual percentage rate (APR). Credit cards typically have a variable APR that changes depending on market conditions, your creditworthiness, transaction type, and borrowing habits.

Fees

Your credit card issuer also makes money from charging you other fees related to your credit card use and borrowing habits. For example, if you open a new balance transfer credit card, making a balance transfer — which involves paying a credit card with another credit card — typically incurs a fee.

Similarly, your card issuer might charge a fee if you authorized a transaction in a different country; this is commonly called a “foreign transaction fee”. It might also charge you annual fees, cash advance fees, returned payment fees, and late fees.

Recommended: When Are Credit Card Payments Due

How Credit Card Companies Make Money From Merchants

The acquiring bank, issuing bank, and credit card network all make money by withholding a small percentage of the authorized transaction amount from the merchant.

Called the “merchant discount,” this fee combines various costs, such as interchange fees. The rate per transaction is determined by the credit card network. The merchant’s bank deducts the fee from the authorized purchase transaction amount, sending the remaining funds to the merchant.

This fee is then divided between the acquiring bank, the card network, and the issuing bank. The issuing bank makes the most money from interchange fees because it assumes the most risk throughout the process if you default on the debt.

Limiting the Amount Credit Card Companies Make From Cardholders

To avoid credit card interest charges, make a credit card payment for your entire statement balance every month. Additionally, using a credit card responsibly, such as by not exceeding your card limit, can help by avoiding an APR increase.

It’s also worthwhile to examine the features of your existing and future credit cards. Consider cards that impose limited fees, such as those that don’t charge annual or foreign transaction fees, for example. Also don’t forget the credit card rule that you can always negotiate on fees or interest for your credit card.

The Takeaway

There are many ways in which credit card companies make money through your purchases, both from you and the merchant you patronize. However, you can reduce how much your credit card companies make off of your purchase by paying your credit card bills on time and in full every month.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Who profits from credit card convenience fees?

A convenience fee charged at the checkout counter is meant to benefit the merchant. Since merchants pay interchange fees for the ability to accept credit card payments, a convenience fee is a way for the merchant to recoup lost funds from credit card transactions. It’s also designed to discourage customers from using their credit card for payment.

Do credit card companies make money if I pay off my balance every month?

Yes, credit card companies still make money even if you pay off your balance each month. They achieve this through various fees. For example, a card issuer might still charge you an annual fee to use its card product or a foreign transaction fee if you use your card abroad. Similarly, a credit card network and credit card processor charges the merchant fees for the benefit of accepting credit card payments.

How do credit card companies make money if they offer cash back?

Despite offering you cash back on your card purchases, credit card issuers can make money through fees and interest charges charged to merchants and consumers. They will charge you interest if you’re unable to pay your statement balance in full each month, and you could face fees, such as a balance transfer fee, late fee, annual fee, or foreign transaction fee, depending on what may apply to your situation.

Photo credit: iStock/Talaj

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.

It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.

Why Use Credit Cards?

Although credit cards can have downsides — especially when someone tends to overspend — they also offer benefits that you can’t get when you pay with other methods. This includes:

•   Fraud protection: It can be easier to dispute charges and fraudulent activity on a credit card as opposed to a debit card or cash.

•   Opportunity to improve your credit score: When a credit card is used responsibly, it can build a person’s credit score.

•   Credit card rewards: Credit cards often come with perks like travel points or cash back.

•   Travel insurance: Some credit cards offer specialty protection benefits like travel insurance.

While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.

It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Why Is Budgeting Important?

Whether using a bank account or credit card, a monthly budget is an essential part of financial wellness. Budgeting can:

•   Help to reach financial goals, such as establishing an emergency fund or saving for a downpayment for a home.

•   Alleviate financial anxiety that can come from uncertainties around finance.

•   Improve credit history through a record of on-time payments and responsible spending.

At first glance, budgeting may seem like a limiting factor, but it actually allows you to spend guilt-free. When budgeters know how much they can spend on certain categories each month and adhere to those guidelines, they don’t have to worry about overspending.

Specific Budgeting Methods You Can Work With

There’s no one-size-fits-all budgeting method. However, here are some popular methods that you might consider trying if you’re interested in creating a personal budget.

The Zero-Sum Budget

In a zero-sum budget, every dollar has a job. However, that doesn’t mean an account should be $0 at the end of the month. Instead, it means that every dollar earned should be allocated to a specific category, with no money left unassigned by the end of the month.

Each time an after-tax paycheck comes in, a zero-dollar budget will assign it to a category, starting with necessities like rent, food, student loan payments, and insurance. The rest goes toward discretionary spending or saving.

Zero-sum budgeting means taking a critical look at each dollar entering a bank account, which can feel frustrating for some but helpful for others. Depending on your preferences, this could be the right type of budget for you.

The Spreadsheet Budget

A spreadsheet or line-item budget groups spending and purchases into categories balanced against monthly post-tax income. In its most basic form, the spreadsheet budget is a list of expenses, shown line by line and grouped by type. Income covers expenses, with surpluses going toward additional savings or debt payoff.

The Online Budget

Apps and other digital tools make budgeting as easy as creating a log-in and connecting existing accounts to track spending. You can also set up budgets for upcoming purchases.

An online tool can be helpful for those who feel intimidated by budgeting prep or prefer a more passive look at spending.

11 Tips for Budgeting With a Credit Card

Using a credit card to budget isn’t so different from a traditional budget. Keep these 11 tips in mind when building a credit card budget.

1. Determine Your Monthly Income

To figure out take-home pay each month, budgeters can consult their bank account or look at paystubs from their employer (typically through an online portal). If your income varies each month, take the average income over the past year to get a rough ballpark figure.

2. Pick a Budgeting Method

A person can’t budget with a credit card if they don’t have a budgeting method in mind. Consider one of the aforementioned methods or an alternative like the 50/30/20 budget, where you allocate 50% of your budget to needs, 30% to wants, and the remaining 20% to savings.

3. Track Your Spending

Some budgeting methods are specific about how spending should be tracked. However, you can easily track your spending with pen and paper, a spreadsheet, or a spending app. No matter the method, it’s important to track each purchase.

4. Categorize Your Spending

When it comes to how to budget credit card payments, it helps to look back at your spending first. Gather financial statements from credit cards and bank accounts for the past month. Break each transaction into a category, such as needs, wants, savings, or something more specific.

With an idea of historical spending, now’s time to put a plan into place moving forward.

5. Create a Plan

Armed with a structure and an understanding of your past spending, now comes the time to plan for the future. When creating a plan, consider:

•   Recurring expenses

•   Savings goals

•   Debt repayment goals

•   Annual subscription costs

•   Emergency savings needs

6. Pay Yourself First

A top priority when budgeting with a credit card should be paying yourself first. That means that when money hits a bank account, it should go toward personal savings goals, an emergency fund, or an accelerated debt repayment plan.

It’s important to prioritize paying yourself first, as many try to budget with the reverse in mind, only setting aside what’s left over at the end of the month. This approach can lead to falling short on savings goals.

7. Calculate Your Expenses

After setting aside money for savings, it’s time to break down the remaining income into monthly expenses. This includes necessities like rent or mortgage payments and wants like dining out or entertainment.

If monthly income can’t cover all of the anticipated expenses, it may be time to cut back on spending. Is there slack in the budget from underused subscriptions? Or can grocery spending go down?

Figuring this out before you swipe can help you to avoid overspending on credit cards.

8. Plan for Debts

The difference between credit card budgeting and traditional budgeting comes when the credit card bill is due. If someone has been primarily spending on a credit card, it’s unlikely they’ll see their bank account change most of the month. However, that changes when the bill comes due.

With each transaction on the card, the budgeter should have enough money in their check or savings to cover the cost. Planning for this debt means avoiding the scramble that sometimes comes with a credit card due date.

9. Simplify Your Billing Schedule

Missing a credit card bill can harm a credit score and add financial stress to a person’s budget. Mark credit card due dates on the calendar each month, and consider paying the bill early or breaking it into multiple payments throughout the month.

10. Use Rewards as a Bonus

The benefit of budgeting with a credit card comes from the various credit card rewards you can earn. Remember to cash in on cash back perks every few months for a discounted bill or redeem the travel miles you’ve earned for an upcoming trip.

11. Avoid Carrying a Balance

Carrying a balance on a credit card could indicate an imbalanced budget due to how credit cards work. When a credit card bill isn’t paid in full, the remaining balance can accrue interest, leading to a ballooning balance that becomes harder to pay.

That’s why upfront planning is essential to budgeting with a credit card. Without a plan in place, there’s a bigger risk of overspending, which can snowball into credit card debt. If you’re using a credit card, it’s important to stick to one of the most important credit card rules of always trying to pay off your balance in full.

Recommended: How to Avoid Interest On a Credit Card

Pros and Cons of Budgeting With a Credit Card

There are benefits and drawbacks to credit card budgeting, including:

The Takeaway

There are advantages of budgeting with a credit card, such as earning rewards, gaining access to credit card perks like travel insurance, and building your credit score if you use your card responsibly. By setting up a credit card budget, you can better prevent yourself from spending more than you can afford and ending up owing interest when you can’t pay off your statement balance in full.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How can I manage my budget with credit cards?

Budgeting with a credit card isn’t different from budgeting without one. The key to budgeting credit cards is not to spend more on a credit card than you can afford to pay off at the end of the month.

Should I budget with a credit card?

If someone can stick to a traditional budget, then budgeting with a credit card might make sense. The difference is remembering to stay up to date with payments, as missing a credit card payment can negatively impact a credit score.

How much of a hold does the budget put on your credit card?

Budget should have a pretty serious hold on a credit card. When people can’t pay their credit card bill in full, they’ll incur interest charges, which can cause them to fall into debt over time and potentially drag down their credit score.

How do credit cards affect my personal budget?

If a budgeter isn’t paying attention when using a credit card, it’s easy to overspend. This can result in putting more on a credit card than you have available in cash to pay it off. As a result, you may end up paying more than the sticker price for your purchases due to interest, leaving you less money leftover for your other needs and savings goals.

Photo credit: iStock/Mirel Kipioro

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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No matter what you do, it generally costs you money to borrow money. In the case of credit cards, you’ll pay interest on any balance remaining after your statement due date, and you may also be subject to numerous other fees.

Understanding how much a credit card costs is important, as it can help you compare cards and choose one that’s right for you at the right price. Read on to learn more about the potential costs of a credit card.

How Much Does It Cost to Get a Credit Card?

The application process for a credit card is free. The process starts by choosing a card that offers the right terms, interest rates, and rewards, if applicable. For example, you may want a card that offers cash back on certain purchases, or if you travel frequently, you may want to choose a credit that offers airline miles.

Once you’ve decided on a card, the application will typically ask you for the following:

•   Name: Credit card companies will need your full legal name.

•   Address: Most credit card companies will require you to have a U.S. address.

•   Social Security number: The credit card company will use this to make a “hard pull” inquiry on your credit report, which will help them determine how risky it is to extend credit to you.

•   Employment status and income: This will help the credit card company determine how big a line of credit you can afford.

•   Country of citizenship and residence: Not all companies will offer cards to noncitizens.

•   Financial assets and liabilities: The credit card company will want to know what other debts you are currently paying off.

Though applying for credit doesn’t cost anything, that doesn’t mean that credit cards are free. Once approved, you do have to pay for having a credit card in certain circumstances.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

Cost of a Credit Card: What to Consider When Choosing a Credit Card

The costs associated with maintaining a credit card are some of the most important points of comparison when choosing between different cards. Here’s how they can stack up:

Interest Rates

Credit cards work by charging you an interest rate, also known as annual percentage rate (APR) on credit cards. Interest applies when you carry a balance from month to month. If you pay off your balance each month, you won’t owe interest.

The average commercial bank interest rate on credit card plans for all accounts is currently 21.59%, according to data released by the St. Louis Federal Reserve. However, interest rates tend to vary from applicant to applicant, largely depending on their credit score.

The better your credit score, the lower the interest rate you may be offered. Banks tend to see individuals with lower scores as at greater risk of defaulting on their loans, so they tend to offer the applicants higher interest rates to offset some of that risk.

Balance Transfer Fees

A balance transfer credit card allows you to transfer the balance on your existing card to another card with a lower interest rate or no interest for a period of time. Most balance transfer cards will charge a fee from as low as 3% to as much as 5% in order to do so.

If you’re transferring a large balance, this fee can quickly add up to a hefty sum, so be sure to carefully compare the cost of the balance transfer to the amount you’d be saving on interest by switching to the new card.

Recommended: What Is the Average Credit Card Limit

Extra Charges When Spending Overseas

Foreign transactions fees are a surcharge that credit card companies tack on to purchases you make overseas that require the processing of foreign currencies or that are routed through foreign banks. These fees are typically around 3%, and if you’re a frequent traveler, they can start to add up.

Check the fine print in the terms and conditions before signing up for a card to see how much you’ll be charged. In some cases, your card may not charge anything.

Late Payment and Credit Limit Fees

Though you can carry a balance on your credit card, there is still a monthly credit card minimum payment that you’ll have to make. Do everything you can to make this payment on time. Not only can missed payments hurt your credit score, but your credit card company may also charge a fee. Miss another payment and that fee could go up. For example, while the late payment charge on your first missed payment could be $28, the second could jump up to $39. Typically, the late fee cannot be more than the minimum amount due on the account.

Another potentially painful side effect of missing a payment: Your credit card company could increase your interest rate, increasing the cost of your unpaid balance and making future borrowing more expensive.

Annual Fees

Annual fees help credit card companies cover the costs of whatever perks and rewards they offer their customers. The more perks a card comes with, the higher the annual fee may be. This fee is typically charged as a lump sum once per year, usually in the same month in which you opened your card, and you’ll pay it off as part of your regular credit card bill.

Convenience Fees

Sometimes you’re charged fees for using your credit by businesses that are not your credit card company. For example, a credit card convenience fee is a fee that’s charged by a merchant and added to the cost of a transaction.

Recommended: How Do Credit Card Payments Work?

Tips for Using Your Credit Card Responsibly

Credit cards are what’s known as revolving credit. They allow you to carry a balance from month to month, making only the minimum payment, and that balance can increase as interest gets added. The bigger your balance, the more money you’ll owe in interest, and your debt can quickly grow out of control. That’s why it is important to use your credit card responsibly.

Here are a couple credit card rules to consider in order to do so:

•   Always aim to pay off your credit card balance in full each month. For most cards, you will not owe any interest on purchases if you do, eliminating one of the biggest costs of having a credit card.

•   Avoid making purchases you won’t be able to pay off each month. Sometimes these expenses are unavoidable, especially in an emergency. If you can’t pay off your debt within a month, aim to do so as quickly as possible.

•   Make a point to review your credit card statement. While it might seem like a slog, reviewing your credit card statement can offer helpful insight into your spending habits. It can also ensure you notice any unauthorized credit card usage or a billing error, in which case you may be able to request a credit card chargeback.

The Takeaway

Maintaining a credit card typically comes with a variety of costs. In some cases, you can avoid credit card fees and interest, such as by paying off your balance in full and on time each month. Also be aware that interest rates and fees are often negotiable. If you’re a longstanding customer or have a particularly good credit, you may have a chance at having a few fees waived or at least lowered.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do you have to pay for a credit card?

Credit card companies may charge a variety of fees including annual fees and late payment fees. You will also have to pay interest on whatever balance you carry from month to month.

How much are credit card fees monthly?

Credit card fees are typically not charged on a monthly basis. For example, the annual fee is usually charged as a lump sum once each year. You may incur other fees, like late payment fees, only when you miss a payment.

Can I use a credit card for free?

If you pay off your balance each month, you may not owe any interest to your credit card company. However, you may still be on the hook for whatever fees your card may charge, such as an annual fee.

Photo credit: iStock/Meranna

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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A prepaid credit card is a type of credit card onto which you load money in advance. You can use the card to make purchases online or at brick-and-mortar stores or to withdraw money at ATMs.

While they have “credit card” in the name, prepaid credit cards are actually quite different from a standard credit card. Here’s a closer look at what a prepaid credit card is, the different types of prepaid cards, and the pros and cons of having one.

What Is a Prepaid Credit Card?

As mentioned before, a prepaid card is a card on which you load money ahead of time, similarly to how you would with a gift card. Some of the same credit card issuers that offer traditional credit cards may offer prepaid credit cards.
The amount you load onto the prepaid card is the maximum amount you can spend on the card, similar to a credit limit. For instance, if you load $200 onto the card, you can spend up to $200.

You can use the card to make purchases or withdrawals from an ATM. Prepaid cards might also be used for government benefits or for payroll.

Many prepaid credit cards are also called prepaid debit cards or stored-value cards. While they may look just like a credit card and bear the logo of a major credit card company like Visa or Mastercard, they’re not actually credit cards.

Because you’re not borrowing from a line of credit, you won’t have to worry about accruing debt, making a minimum payment by a due date, or owing interest. Your activity also will not be reported to the credit bureaus, meaning it won’t affect your credit score or history.

Recommended: What Is a Charge Card

Types of Prepaid Credit Cards

There are two main types of prepaid credit cards: open-loop and closed-loop. Here’s how they differ.

Open-Loop

An open-loop prepaid credit card can be used anywhere that accepts the credit card network that the card is within. For instance, if your open-loop prepaid credit card has a Visa logo, then your prepaid card will be accepted at any merchant, location, or ATM where Visa cards are accepted.

Closed-Loop

Also known as a single-purpose card, a closed-loop prepaid credit card can only be used to make purchases from a single retailer or a group of stores. For instance, you may only be able to use the card when you shop at a particular grocery store chain. Closed-loop prepaid credit cards usually don’t have a credit card network logo on them.

How Does a Prepaid Credit Card Work?

You can use a prepaid credit card to make purchases and take out money at ATMs, just as you can get cash from a credit card. Each transaction you make using the prepaid card will reduce the total balance you have available. So, for instance, let’s say you loaded a total of $500 onto your card. Then, you make a purchase for $150. You would have $350 remaining to spend with your card.

Though it depends on the prepaid credit card, you may be able to reload additional funds onto your card. You can do so by depositing money from a bank account or paycheck, reloading the card at a retail location using cash, or buying a reload pack to add a certain amount to your card.

Advantages of a Prepaid Credit Card

Let’s look at some of the benefits and risks of prepaid debit cards, another common name for prepaid credit cards. Here are some of the upsides to weigh if you’re considering getting one.

Doesn’t Require a Credit Check

A credit check isn’t required to open a prepaid card. As such, it may be an option available to those with lower credit scores or a thin credit history. Further, getting a prepaid credit card won’t require a hard credit inquiry, which can ding your credit.

Provides a Safe Alternative to Cash

A prepaid credit card is a safe, easy alternative to using cash. Depending on the network, a prepaid card might come with liability protections similar to those offered by debit cards.

Doesn’t Necessitate a Bank Account

You won’t need a bank account in order to get or use a prepaid debit card. Unlike debit cards, prepaid credit cards don’t require you to draw funds from a bank account, though if you do have one, you have the option to deposit money from your checking or savings account.

Won’t Cause You To Go Into Debt

Since you’re using money that’s already been uploaded to the card, you won’t have to worry about running a balance on your credit card. Further, you won’t have to worry about making payment due dates, one of the cardinal credit card rules, or the possibility of incurring interest if you can’t pay off your balance in full.

Recommended: When Are Credit Card Payments Due

Disadvantages of a Prepaid Credit Card

While there are a number of positives to prepaid debit cards, there are disadvantages worth considering as well.

Can Carry High Fees

Fees are probably the biggest drawback of a prepaid credit card. Many prepaid credit cards come loaded with fees, which can include the following:

•   Activation fees

•   Monthly maintenance fees, often around $10

•   Reloading or card replacement fees

•   Purchase fees

•   ATM fees for transactions or balance inquiries

•   Check deposit fees

•   Declined transaction fees

•   Inactivity fees

•   Foreign transactions fees

•   Customer service inquiry fees

Just as you would consider how much a credit card costs before applying for you, do the same due diligence on prepaid card fees before getting one.

Does Not Boost Your Credit Score

Prepaid credit cards aren’t actually credit cards, which offer a revolving line of credit. Because they aren’t a form of credit, your activity is not reported to the credit bureaus. In turn, they aren’t a way to build your credit.

Offers Fewer Fraud and Liability Protections

While prepaid credit cards might come with some fraud and liability protections, they typically don’t have the full suite of protections that standard credit cards offer. Instead, their protections, if offered, may be more akin to those offered by debit cards, which are generally weaker than those of credit cards.

Recommended: How to Avoid Interest On a Credit Card

Alternatives to Prepaid Credit Cards

Besides prepaid credit cards, here are a few other options you might consider:

•   Gift cards: A gift card can be used at particular merchants or retailers. There are also gift cards offered by credit card networks, such as Visa or Mastercard, that you can use anywhere these networks are accepted. Like a prepaid credit card, you don’t need a bank account to get a gift card, though using one won’t help you boost your credit. Unlike prepaid credit cards, gift cards don’t typically carry any fees aside from potentially a one-time activation fee.

•   Debit cards: Another option you might consider is a debit card. These do typically require a bank account, however. Like a prepaid card, you’re only using the funds available in the account connected to the card. As such, getting a debit card does not involve a credit check nor will you have to pay interest since you’re not borrowing funds. There may be fees involved though.

•   Secured credit cards: If you have a low credit score or a thin credit profile, a secured credit card — one of the different types of credit cards available — can help boost your credit if you’re using the credit card responsibly. Secured credit cards require a deposit, and the deposit amount is usually the same as the card’s credit limit. Secured credit cards usually have lower fees than prepaid cards, but they do have interest fees. Plus, a credit check is required.

The Takeaway

Contrary to its name, a prepaid credit card isn’t actually a credit card. You aren’t accessing a line of credit with a prepaid card, and you can’t build credit. Instead, you load cash onto the prepaid card, which effectively acts as your credit limit. You can then use the funds to make purchases or withdraw money from an ATM.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do prepaid cards require monthly payments?

Prepaid cards can have a monthly maintenance fee. The amount of this fee varies, typically ranging from $10 to $15 a month. The money is drawn from the existing balance on your card.

Do prepaid cards cost money?

Prepaid cards usually do have fees. This may include an activation fee, ATM fees, reload fees, and foreign transaction fees, among others. Before getting a prepaid credit card, make sure to check what fees are involved.

Is an account needed for a prepaid credit card?

A bank account is not required for a prepaid credit card.

Do prepaid cards help build your credit?

Prepaid credit cards do not help you to build credit. That’s because they’re not actually credit cards and don’t offer a revolving credit line. In turn, your payment history isn’t reported to the three credit bureaus.

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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If you have an active credit card account, you might be offered or have already received unsolicited credit card convenience checks. A credit card convenience check lets you draw a portion of funds from your available credit limit without swiping your card.

Although convenience checks offer the benefit of using your credit line toward other bills — either as a cash advance or a check-based payment for a purchase — they also come with their fair share of issues. Keep reading to learn more about what a convenience check is and how to get one from a credit card.

What Is a Credit Card Convenience Check?

Also known as cash advance checks, access checks, or balance transfer checks, credit card convenience checks let you borrow money against the credit card limit that is available beyond your credit card balance.

Card issuers offer this option as a way to encourage spending on your card account. You can use these checks to pay bills, borrow money, make a balance transfer, or transfer loans to your credit card.

Recommended: When Are Credit Card Payments Due

Pros of Credit Card Convenience Checks

Convenience checks have downsides, but there are pros to them as well:

•   They let you make purchases when using a credit card isn’t accepted.

•   You can use one to pay off other debt.

•   You can access cash quickly with a convenience check.

•   A convenience check borrows against your existing credit line, so you don’t need to undergo a credit check for a new line of credit.

Cons of Credit Card Convenience Checks

There are also a number of drawbacks of convenience checks to consider before using one. These include:

•   You’ll incur an additional fee each time you use a convenience check.

•   Using a convenience check might activate a higher credit card APR for the check amount.

•   You don’t get a grace period, so you’ll start incurring interest immediately.

•   You’ll have fewer protections if your purchase is defective and you need to withhold payment.

•   Your check purchase might not qualify as an eligible purchase under the card’s rewards program.

Factors to Consider Before Getting a Credit Card Convenience Check

Since convenience checks are treated like a cash advance by your credit card issuer, you’ll incur cash advance fees when the funds are drawn from your account. For example, your card issuer or bank might charge a minimum fee of $10 or 3% of the check amount, whichever is greater. Also, if you exceed your available limit and don’t have sufficient funds in your credit card account, you might be charged another fee.

On top of these extra fees, the interest on the check amount accrues immediately at your cash advance APR. Cash advance interest rates are typically higher than the APR charged for swiping your card for purchases at places that accept credit card payments.

If your account is a rewards credit card, purchases or draws using a convenience check are often ineligible for earning rewards. So not only are you paying more money to use the check, you’re losing the benefits of your rewards credit card program.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

How to Get Convenience Checks From a Credit Card

You’ll often get convenience checks in the mail. If you have an existing credit card account, your card issuer might include the checks in your monthly statement. A card issuer might also mail you a promotional offer with convenience checks inside to encourage you to apply for a credit card.

If you have an existing credit card account but haven’t received convenience checks in the mail, you can request them directly. Contact the phone number printed on the back of your credit card, log onto the credit card issuer’s website, or check its app to reach a customer service agent. Make sure to ask about fees you might incur by requesting printed convenience checks, as different types of credit cards carry different fees.

Using Credit Card Convenience Checks

There are many ways to use a convenience check, including:

•   Using it as a cash advance. In this case, you’d write a convenience check to yourself and cash it to access physical currency.

•   Using it to pay off other debts. This could include a loan or other credit card balance. In this scenario, the convenience check acts like a balance transfer vehicle that pays off a third-party credit account. You’ll then repay that balance, plus fees and interest, through your card issuer that provided the checks.

•   Using the checks to pay for goods and services directly. This might come up if you’re dealing with a merchant or vendor that doesn’t accept credit card payments but accepts checks.

If you decide to use a convenience check, it’s more like a physical check from your personal checking account as opposed to how credit cards work. A convenience check has the same familiar fields as a personal check, including a place to write in the date, payee name, amount, optional memo, and your signature.

How Credit Card Convenience Checks Can Affect Your Credit Score

A convenience check borrows money against your existing credit card line, so your credit isn’t verified when using a check. Since convenience checks let you access your credit line through another method other than swiping or tapping your card, they can encourage you to borrow more from your account.

If you borrow large amounts from your credit card account, it can increase your credit utilization ratio. Keeping a high credit utilization ratio can adversely impact your credit score. However, if you repay your balance responsibly and are mindful of your utilization — both key credit card rules to follow — convenience checks can have minimal impact on your credit.

Alternatives to Credit Card Convenience Checks

Although convenience checks are a viable option when you need cash, there are other lower-cost options than turning to your credit card.

Personal Loans

Borrowing a personal loan gives you access to cash at what is probably a lower, fixed APR compared to the variable cash advance APR from your credit card. Some lenders also don’t charge fees of any kind for personal loans. However, you’ll need to undergo a credit check and have strong credit for the most competitive rates.

Earning Extra Income

If time is on your side, increasing your cash flow can help you avoid high interest charges and fees for your next large purchase. Consider selling items that are taking up space in your garage, picking up additional shifts at work, or perhaps starting a side gig, like tutoring, for some additional income.

The Takeaway

A convenience check can be a fast way to access cash or make a purchase when a credit card isn’t accepted. However, the disadvantages of using convenience checks, like costly fees, increased APR, and no grace period, often negate the perks.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Is a convenience check linked to your account?

Yes, convenience checks from credit card companies are tied to an existing credit card account you have with that card issuer. The amount that you write on a convenience check will directly be added to your credit card balance, plus potentially fees and higher interest charges.

Can I write a convenience check to someone else?

Yes, you can write a convenience check out to another person or business as a method of direct payment. For example, you can use a convenience check to pay for a utility bill or as rent to your landlord. Keep in mind that this will mean you’ll pay more toward that purchase, thanks to fees and a higher APR. Proceed with caution.

Where can I cash a convenience check?

You can cash a convenience check anywhere you would cash a personal check. Your personal banking institution can cash the check for you, or you can visit a third party, like a check-cashing establishment.

What are the disadvantages of using credit card convenience checks?

The biggest disadvantage when using a convenience check from your credit card company is the added fees and interest you’ll pay. Each check incurs a flat fee or a fee based on a percentage of the check amount. Additionally, convenience checks are considered a cash advance, which incurs a higher APR on the borrowed amount. Plus, there’s no grace period so interest starts accruing immediately.

Photo credit: iStock/Ivan Pantic

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