At first glance, prepaid debit cards might appear identical to traditional debit cards: You can swipe, tap or dip them to pay at stores, and you can use them to pay for purchases online. However, they function differently. A prepaid card isn’t linked to a checking account like a standard debit card; instead, a cardholder loads funds onto the card for spending.
If you’re thinking about getting one, you have a lot of company. According to the most recent data available from the Federal Reserve, people use prepaid debit cards for more than 18 billion purchases each year.
Before getting a prepaid debit card, read on to learn about the pros, cons and fees associated with this method of payment that has been steadily increasing in popularity.
How do prepaid debit cards work?
A prepaid debit card is also known as a general purpose reloadable card, which means you can use it for most purchases and reload it with more money. Adding money can happen in a lot of ways, including via direct deposit from an employer, an ACH transfer from another bank account, a transfer from a payment app like PayPal or Zelle, and adding money in person at a retail store or an ATM.
When it comes to paying for purchases, you can use a prepaid debit card similar to the way you’d use a credit card or a debit card linked to a bank or credit union account. As long as the merchant is part of the payment processing network -- usually Visa, Mastercard, Discover or American Express -- you can use the card to make the purchase.
Benefits of prepaid debit cards
Prepaid cards can offer plenty of benefits as a money management tool.
Avoid overspending
Prepaid cards can provide a helpful guardrail for your cash flow. If your card’s balance can’t cover the cost, you can’t make the purchase. (Some prepaid cards offer overdraft protection, but it’s wise to decline this option since it typically means additional fees.) Loads of people struggle with the temptation to spend more than they have. Prepaid cards offer many of the same conveniences as credit cards without the risk of accumulating credit card debt.
No bank account is required
If you have a history of poor banking management -- unpaid overdraft fees, for example -- you might face some challenges getting a bank to approve your application for a checking account. Or you may not have access to a bank. In either case, a prepaid card could be a good solution for helping you make payments and manage your money.
Offers protections
Prepaid debit cards are covered in the Electronic Funds Transfer Act, which means you can qualify for fraud protection if a thief steals the card or hacks the account number. This also makes prepaid cards safer than carrying a lot of physical cash.
Additionally, money on a prepaid debit card typically falls under FDIC protection, which covers up to $250,000 if the bank that holds the funds fails. These protections are typically available so long as you register the card in your name on the card’s site.
Limitations of prepaid debit cards
While prepaid cards can help you navigate an increasingly cashless world, there are some downsides to consider.
Lots of fees
Monthly service fees, reloading fees, ATM fees, inactivity fees, transaction fees, balance inquiry fees -- the list goes on. Some prepaid debit cards have been notorious for tacking on extra charges, and they can add up quickly. For example, if you’re paying a $6.95 monthly fee and reloading the card twice each month, incurring a $3.95 fee each time, that adds up to more than $178 every year just to use the card. Be sure to understand the terms and fee structure before purchasing a card.
If these fees sound especially frustrating and you don’t have the option to open a free checking account, consider looking at second-chance checking accounts. Some banks and credit unions offer these accounts specifically for people who had past trouble managing their funds.
Potential inconvenience of reloading the card
If you can’t set up a direct deposit to your prepaid debit card, adding funds to it can potentially be a bit of a pain. You can typically deposit checks at ATMs or through the card’s mobile app. If you’re loading physical cash to your card, you’ll likely need to go to an affiliated bank or a retailer to have them load the amount onto your card. In many cases, you’ll have to pay a convenience fee to add money to your card.
Won’t help build your credit
If you’re hoping to establish a track record of responsible financial behavior, prepaid cards aren’t going to help your credit score. Neither prepaid debit cards nor traditional debit cards factor into your credit reports.
If one of your big goals is boosting your credit score, you’re better off comparing the best secured credit cards. When applying for a card, you’ll need to make a security deposit that acts as your credit limit. The bank will report your payments and credit utilization to the three major credit bureaus. If you use it responsibly, a secured credit card can help improve your credit score.
How to maximize the value of a prepaid card
- Know how to avoid fees: Fees can really pile up on prepaid debit cards. It’s important to find ways to avoid feeling the sting of $2.50 here and another $4.95 there. If you regularly need cash, find a card with an extensive ATM network that can help you avoid those fees. If you need to reload money at a retailer, try to wait until you can load one larger amount to reduce the number of reloading fees.
- Set up direct deposit: You can often avoid monthly fees by setting up a direct deposit to your prepaid card.
- Use the card issuer’s website or mobile app: You may save on fees by using the app to make transactions and can often get access to money management tools like automatic bill payment.
- Look for rewards opportunities: While premium credit cards deliver the biggest rewards, some prepaid cards are designed to help you recoup some of your expenses and will let you earn cash back on some purchases.
How to get a prepaid debit card
- Compare your options: It’s important to shop around for a prepaid card that meets your budget and regular spending habits. Compare fees and limits, and make sure a card’s in-network ATMs are convenient for you.
- Find a retailer or buy one online: The fastest way to get a prepaid debit card is to buy one at a retailer. Walgreens, CVS, Walmart, Kroger, Meijer and 7-Eleven are some of the many stores that sell prepaid cards. You can buy the card and add money at the same time. Alternatively, there are plenty of prepaid cards available online; you’ll just need to wait for the card to arrive in your mailbox, which typically takes between seven and 10 days.
- Register the account: To register and activate the card, call the number on the back of the card or log onto the card issuer’s website or mobile app. You’ll need to provide information like your name, Social Security number, address, date of birth and phone number.
FAQs
You can use a prepaid card to pay for purchases at merchants that are part of the card’s payment network, similar to the way you can use a traditional debit or credit card. Keep in mind that some reservations, like for hotel stays or rental car bookings, require a hold on the card. For a prepaid or traditional debit card, that can mean tying up some of your money for an extended period of time per the company’s policy to hold more than the cost of the reservation.
Prepaid debit cards will typically allow you to withdraw cash at an ATM, which is deducted from your balance. While some prepaid debit cards offer free withdrawals at certain ATM networks, be mindful of racking up fees at machines that aren’t part of your card’s network. Additionally, even if a prepaid debit card issuer promises not to charge you fees, you may wind up paying separate fees to the company that owns and operates the machine.
The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.