Prepaid Visa and MasterCards have become very popular and profitable products offered by many banks today. Being very hungry for new financial market segments, banks finally recognized the demand for an easily obtainable regular credit card substitute.

You may wonder why people would use such a thing as a prepaid credit card. Well, there are about 40 million people today that don’t have a bank account or a credit card for various reasons, and they spend around 1.5 billion on financial services annually. And that is what banks are aiming for.

Basically, prepaid credit cards are convenient financial tools that allow your participation in online shopping, safe transactions and direct deposit transfers. They are much easier to obtain than a regular credit card. There is no credit check or credit history verification involved, meaning anyone can get the card. These cards are what they call “guaranteed approval” cards.

Prepaid debit cards can be used the same way as any regular credit card, as long as they have a Visa or MasterCard logo. There is no difference for the merchant in processing prepaid vs. regular credit cards.

You can easily set up a free direct deposit to your prepaid Visa or reload your card in a “pay as you go” manner, paying cash at the bank branch or retail location.

Very often prepaid cards get confused with debit cards, which are different. Debit cards are usually tied to a person’s regular checking account, which makes the usage of the card more dangerous, as all your checking balance is at stake if an unauthorized transaction happens.

Don’t forget that these cards are profitable instruments for the bank. They are not created for your convenience, but rather to make money for the bank. Therefore, various fees are usually associated with prepaid cards. Some banks charge an activation fee, a reload fee, an ATM withdrawal fee, a lost card renewal fee, a paper statement fee, a cash advance fee, etc.

Another thing to keep an eye on is an overdraft fee. Many people assume that the prepaid card is not a credit card and therefore you can’t spend more than your balance, and as a result, there are no overdraft fees. Not so. Most banks will let you go over just to have the pleasure of charging an overdraft fee.

By the way, according to the credit industry report published by the Wall Street Journal, the bank’s revenue from various default fees went to $18.1 billion in 2007, which now accounts for 39% of the revenue for credit card issuers.

Some people may think prepaid cards can help build credit. That is pure misunderstanding. Prepaid card issuers have no obligation to report your card use habits to any credit bureau. And it is understandable. The money you spend is not a credit line, it is your money, and it is up to you how you manage it.

In conclusion, I would not use a prepaid debit card unless I had a really good reason to do it and clearly understood my financial goals. What I’d recommend instead is using a regular visa debit card from your checking account, or go with any decent secured credit card to start.