What is a Prepaid Debit Card?
A prepaid debit card is much like a gift card: It allows you to spend whatever amount of money is stored on the card. You can reload the card online or at an ATM, a participating store, or another physical location when the balance is used up. Prepaid debit cards are issued by banks and are branded by major credit card companies like Visa, MasterCard, Discover, and American Express.
Key Takeaways
- A prepaid debit card can be a useful alternative to cash.
- Prepaid debit cards are an option for people who don’t have a credit card or access to a regular debit card connected to a bank account.
- These cards often come with various fees, so it’s important to shop around for the best deal.
Understanding Prepaid Debit Cards
A prepaid debit card is as good as cash and sometimes even better. Here are some of the benefits:
- Safety: It is a secure way to carry money, unlike a wad of paper money. Prepaid cards also come with certain consumer protections that cash does not.
- Online Purchases: A prepaid debit card can be used for online transactions.
- Gifting: It can make a more attractive gift than cash.
Anyone who wants to stick to a strict budget or who has had trouble managing credit cards could benefit from this financial tool. You can use a prepaid debit card for any transaction that you might otherwise use a credit card or regular debit card for. The recipient of your payment might even be unaware that the card is prepaid.
Some employers pay their workers with prepaid debit cards referred to as payroll cards. This can be useful if the person doesn’t have a bank account or direct deposit. Many government benefits are also available via prepaid debit cards, including Social Security.
Prepaid Debit Cards vs. Regular Debit Cards
The amount of money you can spend with a regular debit card is tied to the balance in the checking account it’s linked to. You must have a bank account to use a regular debit card; this isn’t the case with a prepaid debit card.
The balance available for spending fluctuates daily with a regular debit card as money moves in and out of your account. With a prepaid debit card, you have a fixed balance, which decreases as you spend and increases only if you reload the card.
The Downsides of Prepaid Debit Cards
Prepaid debit cards can come with an assortment of fees, including:
- Monthly fees
- Transaction fees
- ATM fees
- Reloading fees
- Foreign transaction fees
- Balance inquiry fees
Employees have a legal right to decline being paid through a payroll card because such fees can reduce their take-home pay.
Shopping for a Prepaid Debit Card
When shopping for a prepaid debit card, pay particular attention to the fees. Also, consider the card’s convenience:
- How large is the ATM network?
- Are free ATMs available near your location?
Important
Consider a secured credit card instead of a prepaid debit card if your goal is to repair your credit rating.
An Alternative to a Prepaid Debit Card
If you have a bad credit history or no credit history, a secured credit card might be a better option. Secured cards require a refundable security deposit as collateral, making them easier to qualify for.
The advantage of a secured credit card is that your monthly payments can be reported to the three major credit bureaus, thus helping to build your credit history. Debit cards, prepaid or regular, don’t report transactions to the credit bureaus and will not improve your credit.
Are There Limits to How Much Can Be Added to a Prepaid Card?
Some prepaid debit card issuers impose limits on loading. These limits can apply to daily or monthly transactions. Check with the issuer for details on loadable amounts and potential fees.
Can Prepaid Debit Cards Expire?
Prepaid cards can expire, but there are options to handle this:
- Request a replacement card before the expiration date.
- Ask for the remaining balance to be mailed as a paper check (note that there might be a fee).
- Spend the remaining balance before expiration to avoid losing the funds.
Is My Prepaid Debit Card FDIC-Insured?
Your card can be FDIC-insured if it is from a FDIC-insured bank. Additional steps might be required to register the card to meet FDIC criteria.
The Bottom Line
Prepaid debit cards come with advantages and disadvantages. The interest and fees of a regular credit card might be less than those charged by some prepaid card issuers, but you may not qualify for a credit card. Another alternative is a regular ATM debit card if you have or qualify for a checking account.
Take your time to research and compare different card options to ensure you’re getting the best deal. Check the issuer’s track record, inquire about expiration dates, and consider fees and additional features before making a choice.
Related Terms: regular debit card, credit card, secured credit card, payroll card, FDIC insurance, financial inclusion.
References
- Consumer Financial Protection Bureau. “Know Your Rights”.
- Consumer Financial Protection Bureau. “What Types of Fees Do Prepaid Cards Typically Charge?”
- Consumer Financial Protection Bureau. “What Is a Payroll Card?”
- Consumer Action. “Questions and Answers About Choosing and Using Prepaid Cards”.
- Consumer Financial Protection Bureau. “If My Prepaid Card Expires, Do I Lose My Money”?
- Federal Deposit Insurance Corporation. “FDIC Consumer News: Is The Money on My Prepaid Card FDIC-Insured?”
