What Is a Prepaid Debit Card?

Definition & Examples of a Prepaid Debit Card

A woman uses a prepaid debit card and her smartphone to shop online
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A prepaid debit card is a payment card that's loaded with funds before it's used. It functions like a credit or debit card while shopping, but it doesn't draw on a line of credit or from a bank account.

Learn more about how these prepaid debit cards work, as well as some pros and cons to these cards.

What Is a Prepaid Debit Card?

Prepaid debit cards are payment cards that work like credit cards when you’re shopping, except you aren't borrowing money. Instead, you're spending your own money that you've loaded onto the card in advance. That makes them more like debit cards, but unlike a debit card, you don't have to have a bank account to use them. Just like credit and debit cards, many come from either Visa or Mastercard, and they can be used wherever those kinds of cards are accepted.

  • Alternative name: Pay-as-you-go card

There are many variations on prepaid cards. Some come from major companies like Visa or Mastercard and offer rewards like a credit card. Others are for specific purposes, like a college student who has a prepaid card that allows them to access student services and cafeterias.

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 the card 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)
  • Transfering money from your bank account to your prepaid card

Some cards may charge a fee every time you reload funds. If that's the case with your card, plan your reloads carefully to minimize those fees.

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

Prepaid Debit Cards vs. Checking Account
Prepaid Debit Cards Checking Account
Can be used most places cards are accepted Can be used most places cards are accepted
Not tied to any bank account Debit card tied to account
Can acquire from many stores, companies Must come from a financial institution

Prepaid cards function similarly to a debit card that's tied to a checking account, but there are some major differences to be aware of. 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—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
  • No credit history required

  • No bank account required

  • Help with budgeting

  • Extra privacy

Cons
  • Fewer protections

  • High fees

  • No credit

  • Overdraft protections

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 make the choice to live life without debt and credit scores.
  • 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, 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 steal as much money as you have on the card, and they don'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. Also, 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 have 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.
  • 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 by allowing overdrafts (and charging steep fees).

Key Takeaways

  • A prepaid debit card is a payment card that functions similarly to how debit and credit cards do, but the funds are preloaded.
  • Once the funds run out, the card will stop working (unless the card has overdraft protection).
  • Prepaid debit cards work well for instilling good spending habits in people who don't trust themselves with credit cards, but they don't build credit.

Article Sources

  1. Federal Trade Commission. "Prepaid Cards." Accessed Oct. 9, 2020.

  2. Federal Trade Commission. "Lost or Stolen Credit, ATM, and Debit Cards." Accessed Oct. 9, 2020.

  3. Experian. "Do Prepaid Cards Help Credit Scores?" Accessed Oct. 9, 2020.