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A prepaid card is a payment method where you—or an employer or government agency—can deposit funds that can then be used to make purchases or ATM withdrawals. Typically, you can't spend more than the amount you've deposited; transactions over that amount will be denied, unless your card comes with an overdraft protection program.
Prepaid cards won't help you build credit like credit cards can, and they're not connected to a bank account like debit cards. They can carry lots of fees, such as monthly fees, transaction fees and cash reloading fees. It's important to weigh the pros and cons before getting one. Here's what to know about prepaid debit cards.
What Are Prepaid Debit Cards?
Prepaid cards must be loaded with funds before you can use them. Cards may be for one-time use, like gift cards, or reloadable. They're available at major retailers, supermarkets and gas stations; at participating banks and credit unions; and online.
You can have a paycheck or government benefits directly deposited to them, or load cash onto them at reload locations. There may be daily, weekly or total limits to the amount you can deposit. To make payments or ATM withdrawals, they work anywhere you can use a traditional debit card.
Prepaid Cards vs. Debit Cards vs. Credit Cards
Prepaid cards are different from debit cards in that they're not linked to a checking account, so you don't need to have a bank account to get one. It's typically not possible to spend more than the amount you've added to the card. But some providers offer overdraft protection up to a certain amount if you also set up direct deposit, or if you add more funds to the card within 24 hours of the overdraft.
Unlike a credit card, you don't need to pass a credit check to receive a prepaid debit card. You won't pay interest on purchases because they'll be debited from the amount you've added to the card. These cards don't allow you to carry a balance or to pay off your purchases over time.
Prepaid cards come with multiple fees to watch out for, such as fees for loading and spending money, which you may not find on a debit or credit card. You could also pay fees for monthly maintenance, some ATM withdrawals and international transactions.
Pros and Cons of Prepaid Cards
Prepaid cards may be a worthwhile payment solution for some, but there are significant drawbacks to keep in mind.
Pros
- Access to card payment if you don't have a bank account
- Ability to avoid debt, bank overdrafts and interest accrual
- Expense tracking through your card's online account, if available
- If your card is lost or stolen, fraudsters can't access your bank account or credit line
Cons
- Will not help you build credit
- Come with more fees than credit and traditional debit cards
- Can be inconvenient to regularly reload cash
- May not be accepted by all merchants
How to Use a Prepaid Card
Here's how to make the best use of a prepaid debit card.
- Choose a card. You can shop for prepaid cards online or in person at stores, banks and credit unions. Look for features that are important to you, such as overdraft protection, low fees, access to an online account or the option to make bill payments.
- Understand the fees. Since prepaid cards can come with a lot of fees, check the card's detailed fee schedule. Consider how you plan to use the card, and opt for one that meets your needs: a card that doesn't charge inactivity fees, for example, if you plan to use the card sparingly.
- Load the card with funds. Typically, you can load a prepaid card using cash at an ATM, retailer or bank branch; a transfer from checking or savings; direct deposit from your employer; a paper check; or a transfer of government benefits, including a tax refund. It's less likely you'll be able to load a prepaid debit card using a credit card.
- Make purchases or ATM withdrawals. You can make purchases just like you would with a bank debit or credit card. Prepaid cards generally can also be used to withdraw cash from ATMs, but fees may be charged. To use your prepaid card at an ATM, you'll create a four-digit personal identification number (PIN), like you would with a debit card. Additionally, some prepaid cards allow you to make online bill payments.
Do Prepaid Cards Build Credit?
Prepaid cards will not help you build credit. Your payments will not be recorded on your credit report, and your use of the card will not affect your credit score. In this way, they're more like traditional debit cards associated with a bank account.
Alternatives to Prepaid Cards
There are many options beyond prepaid debit cards that can provide the same or better benefits with lower fees. Especially if you're opting for a prepaid card because you have no credit history or are rebuilding credit, here are your alternatives:
- Secured credit card: To get a secured credit card, you'll pay a cash deposit and then receive a credit line in that amount, similar to a prepaid debit card. You can then use the card as you would any traditional credit card. The difference is that your card usage will be reported to the credit bureaus, helping you build credit. You won't be able to receive direct deposit of paychecks to the card, however.
- Credit-builder loan: Another way to build credit, a credit-builder loan lets you build up a savings account by making regular monthly payments to a lender. Make sure the lender reports your payment activity to all three credit bureaus. You won't be able to use a credit-builder loan as an ongoing payment method, but it can help you grow your credit with the goal of qualifying for a traditional credit card or other financial products in the future.
- Traditional debit card: You could also opt for a bank account with a traditional debit card, which may come with lower fees. Credit unions in particular generally offer lower fees—and lower interest rates on loans—than large banks.
- Credit-building debit card: Some bank accounts offer debit cards that provide a way to build credit. The Experian Smart Money™ Digital Checking Account & Debit Card can help you build credit without debt by linking to Experian Boost®ø, which gives you credit for eligible bill payments after three months of payments. You'll also pay no monthly fees¶ and have access to more than 55,000 fee-free ATMs worldwide**. See terms at experian.com/legal.
Even if your employer or a government agency offers a prepaid card as an option for receiving pay or benefits, you can choose an alternative method of receiving money, such as direct deposit to a bank account. Prepaid cards come with fees that may significantly impact you, such as inactivity, service and ATM fees, and using a traditional debit card instead will likely save you money.
Learn more >> Secured vs. Prepaid Cards: What's the Difference?
The Bottom Line
A prepaid debit card may be useful in some circumstances. Perhaps you're eager to avoid debt or stick to a budget for a specific reason—such as if you're helping your teen learn money management skills. But, in general, prepaid debit cards come with fees that can be avoided by opting for a secured credit card or traditional debit card. Make sure to consider the pros and cons and to shop intentionally for a card that is well suited to your needs.