What is a Prepaid Debit Card?

How This Pay-As-You-Go Option Works: Pros and Cons

Handing over a card
••• londoneye / Vetta / Getty Images

Prepaid debit cards work like credit cards when you’re shopping, but there’s one major difference: You're spending your own money, which you've loaded onto the card in advance—not borrowing funds. That makes them more like debit cards, but you don't have to have a bank account to use them.

Prepaid cards have a lot of pluses, but there are some pitfalls to be aware of, too. To make the most of prepaid cards and decide if they’re right for you, find out how they work and learn the pros and cons.

How Prepaid Cards Work

You can get prepaid (or pay-as-you-go) cards from a bank or credit card company or even buy them from the store. Once you've got your card, you need to load money onto it. Prepaid cards are reloadable, so you can add money to your account again and again.

Adding Funds to Your Card

You might add money to the card when you purchase it; some cards are designed for one-time use and come pre-loaded with funds. Or, you can add money later, in several ways:

  • Set up direct deposit to the card
  • Bring cash to a retail store that can add funds to your card
  • Deposit a check with an app that is linked to your card (by taking a photo of the check)
  • Transfer money from your bank account to your prepaid card

You should carefully plan your reloads, though; most prepaid cards charge a fee for reloading. Once you’ve added funds to your card, you can spend that money or withdraw it in cash at ATMs.

Shopping or Withdrawing Cash With Your Card

Prepaid cards look and feel just like standard credit and debit cards. They're plastic, with a magnetic stripe on the back, and sometimes they have a chip for security. Prepaid cards use the Mastercard or Visa payment network, too, just like credit and debit cards.

To buy something, just swipe or insert the card into the reader if you’re at a retailer, or type in your card number if you’re shopping online. 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, however.

How Prepaid Cards Are Different

Prepaid cards are different from both bank debit cards and credit cards. The main difference between prepaid cards and a bank debit card is that you don't need to have a regular bank account to get and use the prepaid card. You can have a regular bank account and use prepaid cards on the side to manage some of your spending, or you can use prepaid cards exclusively, with no bank account at all.

With a prepaid card, unlike with a credit card, you can’t spend money you don’t have. Once you’ve used all of the loaded funds, the card won’t work until you load more. Credit cards, on the other hand, let you spend money you don't have with the promise you'll pay it back later (with interest). Credit cards also require minimum payments, late fees, and finance charges—prepaid cards don't (although they do charge other fees).

Pros of Using a Prepaid Debit Card

While prepaid cards don't make sense for everyone, they still make sense for specific situations and offer users some financial flexibility. If any of the situations below apply to you, you can reap the rewards of using a prepaid card.

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 make the choice to live life with no debt and no credit scores. However, if you have a history of writing bad checks, you may have trouble getting a card from certain prepaid card issuers.

No bank account required: Prepaid cards 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. In some cases, prepaid cards can cost less to use than a bank account. Finally, prepaid cards can provide access to services such as online bill pay and mobile check deposit for those who prefer to live without 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, and can also make sense for those living on a fixed income or relatives visiting from another country. Whether you use a prepaid card or a bank-issued debit card, make sure to find out if overdraft protection will allow you to overspend—and disable that feature if you don’t want it.

Extra privacy: if you’re concerned about security or privacy, you might hesitate to use your everyday debit or credit card in certain situations. Perhaps you’re traveling in an area that is notorious for credit card fraud, or you want to make purchases you’d rather not use your everyday card for. In these cases, you can insulate your normal accounts by using a prepaid card.

Cons of Prepaid Cards

With so many benefits, what’s the catch? Prepaid cards come up short in a few areas:

Fewer protections: Prepaid cards do not provide as much protection to consumers as traditional credit and debit cards. For example, what happens if your card number is used fraudulently, or your card issuer goes belly-up? Your funds 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 are known for their high fees and confusing fee schedules. In the past, the expense made prepaid cards a last resort for people who could not open regular bank accounts. Issuers have since lowered the fees somewhat, but you still need to research the potential charges and think about how you’ll use a card before opening an account. You may be able to eliminate some fees by comparison shopping.

No credit: Prepaid cards do not help you build credit. They allow you to spend as if you have a credit card, but since your activity is not reported to credit bureaus, your credit score is unaffected. If you want the convenience of plastic but you need to build credit, consider a secured credit card—even one with an annual fee. After you've improved your credit score, you can switch to a better card.

No interest: Although prepaid cards make it easy to spend money, it’s hard to save money (much less earn interest) unless you have an interest-bearing savings account. If paying a few extra bucks in bank fees means you’ll accumulate savings throughout the year—even if it’s just a mental trick to get yourself to save—it’s probably worth the cost.

Overdraft temptation: Prepaid cards are supposed 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 than you have by allowing overdrafts (and charging steep fees). If you chose a prepaid card hoping you'd stop spending when the card ran out of money, overdrafts will throw a wrench in your plans. Make certain your card doesn't have this feature so you can save yourself from blowing your budget or paying expensive fees.

Limited transactions: Your card may limit the amount you can reload, spend, or withdraw within a certain time frame. You'll want to make sure your card can handle the size or frequency of the transactions you'll want to make with it (without gouging you with fees).

Expiration dates: Prepaid cards don't last forever; your card will come with an expiration date, after which you'll need to be issued a new card.

Alternatives to Consider

If you've weighed the options and decided not to go with a prepaid card, it might be best to go with a proper bank-issued debit card and checking account. You can avoid many (if not all) of the bank fees by choosing a fee-free online checking account.

If you have a rocky banking history, a regular checking account with fees may still beat out the cost of depending exclusively on prepaid cards for your financial needs.

On the other hand, if you know you can pay the bill off every month, credit cards offer far more protections against fraud or abuse. Plus, you can use them to build credit and improve your credit score, which can help you secure better interest rates on loans and mortgages in the future.