Alternative name: Pay-as-you-go card
How Does a Prepaid Debit Card Work?
You can get prepaid debit cards from a bank or credit card company. You may even be able to buy them over the counter at a store. Prepaid cards are reloadable, so you can add money to them whenever you need to replenish the funds.
Adding Funds to Your Card
Some cards come with funds on them. You buy a card with a set value, and that’s how much money comes with the card. Others are designed to be loaded with funds as needed. If you can add funds, you may have several options for doing so, including:
Setting up direct deposit to the card Bringing cash to a retail store that can add funds to your card Depositing a check with an app that is linked to your card (by taking a photo of the check with your smartphone) Transferring money from your bank account to your prepaid card
Shopping or Withdrawing Cash With Your Card
Once you’ve added funds to your card, you can spend that money or withdraw it in cash at ATMs. To buy something in person, just swipe or insert the card at the point of sale. If you’re shopping online, type in your card number. At an ATM, just insert your prepaid card like any other bank card, and withdraw cash. Be aware that you could be charged a fee for every purchase or ATM visit, though it depends on how the issuer has structured the card.
Prepaid Debit Cards vs. Checking Account
The main difference between a prepaid card and a bank debit card is that you don’t need a regular bank account to get and use a prepaid card. You can have a regular bank account and use a prepaid card on the side to manage some of your spending, or you can use prepaid cards exclusively—without any kind of bank account. Since prepaid debit cards aren’t tied to a checking account, they’re also easier to acquire. You may be able to find one while you’re shopping for groceries or picking up some odds and ends for the house. Debit cards linked to a checking account, on the other hand, must be acquired from a financial institution that offers a checking account. That means there will be a much more rigorous application process compared to simply paying for a prepaid debit card at a store.
Pros and Cons of Using a Prepaid Debit Card
Pros Explained
No credit history required: Anybody can qualify to use a prepaid card. Because you’re not borrowing money, the card issuer will not check your credit score before issuing the card. This is especially appealing to people with less-than-perfect credit, including young people who have not yet built up their credit. Some people even choose to do without debt and credit scores. No bank account required: A prepaid card can work as an alternative to a checking account at a bank or credit union. If you can’t or don’t want to open a checking account, a prepaid card allows you to still enjoy the convenience of paying with plastic, such as online bill pay and mobile check deposit. In some cases, prepaid cards can also cost less to use than a bank account. Help with budgeting: If credit cards are a little too tempting, a prepaid card can help you avoid going into debt. If the money is not loaded onto your card, you can’t spend it. Prepaid cards work well for teens and college students who haven’t built up healthy spending habits, as well as those living on a fixed income or relatives visiting from another country. Extra privacy: If someone steals your preloaded debit card, they can only access as much money as you have on the card, and they won’t have any financial information about you. When you’re using a debit card linked to a bank account, a thief who takes the card can learn a lot more financial information about you.
Cons Explained
Fewer protections: While you have extra privacy protections in cases of theft, you actually have fewer protections for recovering stolen funds. Prepaid debit cards are handled more similarly to cash—the stolen funds are gone. Debit and credit cards, on the other hand, have some built-in fraud protection that makes it easier for consumers to recover stolen funds. Your funds on the prepaid debit card might not be insured by the FDIC. Although consumer protection is improving, and many card issuers voluntarily provide some benefits, some cards offer much less protection than others. High fees: Prepaid cards can come with high fees or confusing fee structures that end up eating a significant chunk of your funds. You may be able to eliminate some fees by comparison shopping, but the onus is on the consumer to find a favorable fee structure. No credit: Prepaid cards do not help you build credit. They allow you to spend by swiping as if you had a credit card, but your activity is not reported to credit bureaus. That means your credit score won’t be affected—either positively or negatively. Overdrafts: Prepaid cards are meant to use your money, not a lender’s. The idea is that you stop using the card when you run out of money, but some cards encourage you to spend more by allowing overdrafts and then charging steep fees.
