When you don’t have a credit card or a bank account with debit card access, it can be difficult to make certain types of purchases.
According to a survey released by the Federal Deposit Insurance Corporation (FDIC) in October of 2018, 20% of US households hadn’t used mainstream credit for at least one year. Another 8.4 million households didn’t have a bank account at all.
If you currently lack a credit card or debit card, you might be considering a prepaid debit card as an alternative. While a prepaid debit card can sometimes be helpful when you don't want to (or can't) pay with cash, there are also significant drawbacks that come with this payment method.
This guide aims to explain how prepaid debit cards work. We’ll also walk you through the pros and cons of prepaid debit cards and some potential alternatives that might be a better fit.
So, what is a prepaid debit card and how does it work exactly? For some people, a prepaid debit card is an alternative to a traditional checking account. It looks like a credit card or debit card on the outside, but works like a gift card. You can buy prepaid debit cards online, at many retail stores, and at some banks.
As a prepaid cardholder, you start by depositing a certain amount of money on the card (or buying a card that has a specific preloaded amount). As you make purchases with the card, your preloaded funds decrease.
Unlike a gift card, prepaid debit cards give you the ability to reload the account with money once you spend the funds on the card. If you continue to add money to the card when it runs low, you can use the payment method again and again until it expires.
Prepaid debit cards are becoming more common and are used for a variety or purposes. For example, some employers may offer to deposit your paycheck onto a prepaid card. You can even opt to receive your tax refund or stimulus check on a prepaid card.
Prepaid debit cards aren’t the right fit for everyone. Here are some benefits and drawbacks to consider before you become a prepaid cardholder.
Anyone over the age of 18 can purchase or use a prepaid debit card. There are no credit checks, ChexSystem checks, or bank account requirements associated with the payment method , making it easy for just about anyone to have a prepaid card account.
With a credit card, you borrow money from a bank and agree to repay it at a later date. However, the credit card company will allow you to make a minimum payment and revolve your remaining credit card balance from month to month - charging you interest for the privilege.
With prepaid cards, you can only access money you have already loaded onto the card account. There’s no risk of going into debt. That said, it’s just as easy to mismanage your money on a prepaid card as it is with a debit card or a credit card.
Depending on the company that manages the prepaid card, you may be able to load funds with cash, direct deposit, or via a mobile app or bank transfer.
Have you ever wanted to make a purchase online or over the phone but you weren’t comfortable disclosing your true debit card or credit card number? A prepaid card may be an alternative worth considering in this situation.
You can load the card with just enough money to cover your transaction if you’re worried about the possibility of someone trying to withdraw additional, unauthorized funds from your bank account.
Using a prepaid debit card will not help you build your credit score rating. Once you build your credit score, it comes with a lot of benefits, like the potential to save you money and qualify for credit and services. So, the lack of credit-building potential with prepaid cards can be a big disadvantage when compared with other payment methods like credit cards that allow you to establish a credit history.
There are no interest fees associated with prepaid debit cards. But they can still be expensive.
With prepaid cards you may have to pay considerable fees - and they are often hidden. From overdraft fees to extra charges on your ATM withdrawals, these extra expenses can really add up if you're not paying attention. You may even have to pay an account opening fee or reload fee in some cases.
It’s not uncommon for prepaid cards to come with:
Prepaid debit cards are widely accepted by many businesses. However, there are companies that may be unwilling to take your prepaid card as a payment method.
For example, if you want to sign up for a recurring service, reserve a hotel room, or rent a car, a prepaid card might not do the trick. Often you'll need to supply a traditional credit card or, in some cases, a large cash deposit if you don't have a credit card available.
While prepaid debit cards and credit cards may look similar on the outside, there are some significant differences between them.
Prepaid debit cards aren’t linked to a bank account. So, they’re less convenient to use in the long term, especially when you factor in the need to reload funds. Prepaid debit cards tend to be more costly as well.
A traditional debit card, on the other hand, is connected to your bank account. It's like a plastic check. Your bank or financial institution deducts the funds you spend on your debit card from your checking account.
Should your prepaid credit card balance reach zero, future transactions will generally be declined (unless you have overdraft protection).
In the past, prepaid cards didn’t receive the same fraud protection as traditional debit cards. However, the Consumer Financial Protection Bureau (CFPB) changed that shortcoming with a rule it put into place on April 1, 2019.
If you report the loss or theft of a prepaid card promptly, the company must investigate and typically reimburse you for unauthorized charges.
(Note: Credit cards still have stronger fraud protections thanks to the Fair Credit Billing Act.)
|Prepaid debit cards||Traditional debit cards|
|Must reload when funds run out||Linked to your bank account|
|Potentially high (and hidden) fees||Numerous no-fee options available|
|May not be accepted everywhere||More widely accepted (though somewhat limited compared to credit cards)|
|No potential to build up debt||No potential to build up debt|
|No interest||No interest|
|No borrowing — spend your own funds||No borrowing — spend your own funds|
|Offers fraud and theft protection||Offers fraud and theft protection|
Prepaid debit cards will often feature a card network logo such as Visa, MasterCard, American Express, or Discover. Yet don’t let these logos confuse you. Prepaid cards aren’t the same as traditional credit cards.
With prepaid debit cards, no bank is extending credit to you. Rather, you are spending your own money. So, you don't have to worry about interest rates, credit limits, due dates, or minimum payments.
Because prepaid cards aren’t an extension of credit, the accounts are not reported to the three major credit bureaus — Equifax, TransUnion, and Experian. The accounts don’t show up on your credit reports and they don’t impact your credit scores for the positive or the negative.
|Prepaid debit cards||Credit cards|
|No interest||Pay interest if you revolve a balance|
|Potentially high (and hidden) fees||Many no-fee options available|
|May not be accepted everywhere||Widely accepted payment method|
|No potential to rack up debt||Can build up debt if you don’t manage well|
|No credit-building potential||Potential to build credit when managed responsibly|
|Offers fraud and theft protection||Offers stronger fraud and theft protection|
People may choose to use prepaid debit cards for a number of reasons.
Some prefer the payment method because they’re not fans of credit cards (or they’re afraid they can’t qualify for an account).
Others may opt for prepaid cards because they have trouble qualifying for a bank account due to past financial mistakes. See our related article about second-chance bank accounts.
Yet even if you have poor credit or difficulty opening a traditional checking account, that doesn’t mean a reloadable prepaid card is your only option.
A secured credit card could be a much better alternative for several reasons:
A secured card requireds a security deposit to open the account. The deposit is typically equal to your credit limit.
Because you’re securing the account with personal funds, there’s less risk involved for the issuing bank. So, you may be approved for a secured card even if you are new to credit or made credit mistakes in the past.
Most secured credit card issuers report these accounts to the credit bureaus. Once they appear on your credit reports, they can factor into your credit scores in several ways.
If you manage your secured credit card responsibly with on-time payments and low credit utilization, a secured credit card could go a long way toward helping you earn the good credit scores you desire.
It takes time to build credit from scratch or to rebuild damaged credit. However, a well-managed secured card could be a great step in the right direction. (A credit builder loan might also help you here, especially if you don’t have installment accounts on your credit reports.)
As your credit improves little by little, it could open the door to better, unsecured credit options down the road. See our article about [how to use secured credit cards to build credit](https://www.self.inc/blog/secured-cards-build-credit "Learn how to use secured credit cards to help you build credit in this post from Self.)".
For most people, a prepaid debit card isn’t the best choice when it comes to payment options.
Credit cards offer credit-building potential and robust fraud protections in the event of loss or theft.
Debit cards, while lacking some of the benefits of credit cards, offer more convenience than prepaid cards and are more widely accepted.
Still, if you opt to purchase a prepaid debit card anyway, be sure to do your homework first. There can be a big difference between the products different reloadable prepaid card issuers offer.
Some cards, such as American Express brand cards, may not be as widely accepted as Visa and Mastercard prepaid cards. Shop around for the best deal available — paying special attention to card fees, benefits, and features.
It's also important to purchase and reload your prepaid card at the right location if you want to avoid transaction fees.
The Bluebird by American Express, for example, features some of the lowest fees on the market. You can purchase a Bluebird account Set Up Kit, which includes a temporary card, for $5 at Walmart or sign up for a permanent card online free of charge. Reloading cash onto the card is free at Walmart stores, but could cost a small reload fee elsewhere.
Here are some popular prepaid debit card options to help you get started:
|Bluebird by American Express||- No monthly fees
- Free ATM network
- Family accounts available
|Fifth Third Access 360° Reloadable Prepaid Debit Card||- $4 monthly fee waived for Fifth Third customers
- Can add co-account holders
- Free ATM network
|Walmart MoneyCard||- Earn 1%–3% cash back on select purchases
- Earn 2% annual interest on savings
- No monthly fee
|MOVO Digital Prepaid Visa||- Works with Apple Pay, Google Pay, and Samsung Pay
- No physical card
- No monthly fees
Don’t forget to check with your local bank to see if they offer prepaid debit card options. Sometimes you can find lower-cost options with a traditional financial institution, even where prepaid cards are concerned.
Federal Deposit Insurance Corporation. “Unbanked Rate Declines to 6.5 Percent in 2017” https://www.fdic.gov/news/press-releases/2018/pr18077.html Accessed March 25, 2021
National Consumer Law Center. “Summary of the Consumer Financial Protection Bureau’s Prepaid Card Rule” https://www.nclc.org/issues/summary-of-cfpb-prepaid-card-rule.html Accessed March 25, 2021
Federal Deposit Insurance Corporation. “FDIC Law, Regulations, Related Acts 6000. Consumer Protection” https://www.fdic.gov/regulations/laws/rules/6000-500.html Accessed March 25, 2021
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See Michelle on Linkedin and Twitter.