How Do Prepaid Debit Cards Work?

What’s a popular gift that can also do a few things better than a credit card or a bank card? The answer is prepaid debit cards. While their primary purpose used to be for gift cards, many now offer common banking services, helping consumers without a bank account.

And even if you have a bank account, prepaid debit cards can sometimes be a better option for spending. In 2019, 8.5% of U.S. households used general-purpose reloadable prepaid cards.

So how do prepaid debit cards work and what can they do better than your credit card or bank debit card? Let’s dive in.

Prepaid Debit Cards

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How Prepaid Debit Cards Work

In addition to banks and websites, prepaid debit cards are now commonly available in grocery stores and big-box retailers. Some employers also pay their employees with prepaid debit cards.

Just like credit cards, prepaid debit cards are offered under the Visa or MasterCard label and can be used anywhere either is accepted – which is just about everywhere. (A smaller number of prepaid debit cards are available through American Express and Discover.)

You can use prepaid debit cards to make in-store purchases, online transactions, and even to access ATM machines. In that way, they work very much like bank debit cards.

Once you get a prepaid debit card, the first order of business is to load funds onto the card (see next section). One of the most important considerations with prepaid debit cards is that you can only spend the amount of money you load onto the card. For example, if you load $300 onto the card, that is your maximum spending limit.

Prepaid debit cards work like gift cards except, they are more commonly reusable. After spending all the funds you load onto the card, you can easily add more funds to continue using the card.

How to Load a Prepaid Debit Card

Most prepaid debit cards offer multiple options to load and reload cash on the card. Exactly how much you’ll need to load onto the card depends on where you get the card. For example, a bank, credit card company, or online issuer may allow you to buy the card without loading any funds. But if you buy a card through a retailer, you generally need to load some money on the card. This can be anywhere from $50 to $500 or more.

Once you have your card, or you want to reload funds, you can do so by making transfers from your bank account. But even if you don’t have a bank account, you can load the card other ways. These include having your paycheck direct deposited into the card, depositing a paper check at an ATM, or even loading cash at participating retailers.

As for the retailers, you’ll generally be able to reload your card from any that provide services through either Green Dot or MoneyPak.

How to Withdraw Money From a Prepaid Debit Card

Just as there are multiple ways for loading funds onto your prepaid debit card, there are also several ways to access it.

Many prepaid debit cards allow you to access cash at ATMs that are part of a fee-free ATM network. Since these networks usually have thousands of machines, ATM access is available nationwide.

If the card provides for it, you may also be able to access funds from retailers participating in the GreenDot and MoneyPak networks.

Depending on the terms of your card, you may also be able to get cash back at the register when you make in-store purchases. This is similar to the way you can get cash back using bank debit cards. Not all issuers provide this option, but if it is permitted, you’ll be able to access cash up to either a fixed limit – like $50 – or the available funds you have loaded on the card.

Some prepaid debit cards may even allow you to move funds from your card into a bank account.

Prepaid Debit Card Pros & Cons

Pros:

Prepaid debit cards can be used like bank account debit cards and credit cards.
Because they don’t require credit and income checks, virtually anyone can get a prepaid debit card.
Since you can’t spend more than you have loaded on the card, they can work as an important budgeting tool.
The cards can be more secure than credit or bank debit cards because they can be purchased anonymously (in the case of retailers). In addition, a thief will not be able to use the card to run up charges, like a credit card, or drain your bank account.
Because of the security advantages, prepaid debit cards are often a superior way to make online purchases with unknown merchants.

Cons:

Prepaid debit cards do not enable you to build or improve your credit.
The cards can come with more fees than bank account debit cards and credit cards.
You cannot spend more than the available funds you have on the card.
While prepaid debit cards are similar to bank debit cards, there may be certain transactions that are not permitted. For example, it may not be possible to use the card to rent a car or check into a hotel (though many car rental companies and hotel chains allow you to pay the final charges using a prepaid debit card).

Who Are Prepaid Debit Cards Best For?

There are specific consumer groups and circumstances where prepaid debit cards are particularly beneficial:

The unbanked. According to the FDIC, about 4.5% of Americans – or 5.9 million – do not have a banking relationship. These consumers can miss out on the benefits of that relationship. But a prepaid debit card can offer many benefits of a traditional bank account.

Consumers with poor credit. Prepaid debit card issuers don’t check applicant credit ratings. You can get a card even if you have poor credit or an unsatisfactory previous banking relationship.

Anyone needing safe online purchases. It’s possible to purchase a prepaid debit card anonymously. That means you can make purchases online, without disclosing any sensitive financial account information that can be stolen by thieves or unscrupulous operators.

Kids and teens. In today’s economy, transacting business with a credit or debit card is normal, expected, and sometimes required. If you have kids or teens, and you want to teach proper card usage, a prepaid debit card is a perfect strategy. The child or teen can have a card with a fixed spending limit. Since they cannot exceed that limit, there’s no possibility of running a credit balance or overdrawing an account.

Traveling. Because it is such an attractive target, traveling with cash is ripe for theft. A prepaid debit card is an excellent alternative to cash. And if you’re traveling within the U.S., you can use prepaid cards to access cash through ATM machines and retail locations.

As a budgeting tool. Budgets often fall apart because debit cards make it possible to overdraw an account, and credit cards hold the possibility of running up a balance. Because prepaid debit cards have spending limits, which you determine in advance, they can help you stay within budget.

Do Prepaid Debit Cards Build Credit?

Unfortunately, the answer to this question is no. Precisely because prepaid debit cards require prepayment, there is no opportunity to generate an outstanding card balance, similar to credit cards.

No card payments mean there’s nothing for the card issuer to report to the credit bureaus.

Yes, prepaid debit cards provide certain valuable banking services to their holders. But they won’t help you build credit.

Tip

Need to work on your credit? Check out 10 Simple Ways to Improve Your Credit Score Fast

Prepaid Debit Cards vs. Bank Debit Cards

Prepaid debit cards and bank debit cards have more in common with one another than either has with credit cards. That’s because both cards limit spending to no more than the funds you have available in the account. (Although it may be possible to run an outstanding balance if your debit card is attached to a checking account that has overdraft privileges.)

For spending purposes, prepaid debit cards and bank debit cards work much the same. You can use them to make in-person purchases, online transactions, and also to access ATM machines.

But a major area where they are different is in account funding. While prepaid debit cards require specific funding to your card, bank debit cards are tied to your checking account. That means you can access as little or as much of the checking account as you like.

The two areas where prepaid debit cards have an advantage are security and poor credit applicants. On the security front, prepaid debit cards can be used without compromising sensitive financial institution credentials. And you can apply for a prepaid debit card even if you have poor credit or an unsatisfactory previous bank relationship.

Prepaid Debit Cards vs. Secured Credit Cards

As disclosed earlier, prepaid debit cards cannot be used to build credit. But that’s the primary purpose of secured credit cards.

As the name implies, a secured credit card is a credit line secured by a deposit held by the issuing institution. For example, a bank may issue a secured credit card with a credit line of $1,000 if you deposit the same amount into a savings account as collateral.

The credit card can be used just like any other credit card, but the spending limit is $1,000. You’ll be required to make monthly payments on the outstanding balance on the account. Those payments can be reported to the credit bureaus, which allows you to build or improve your credit score.

See our list of Best Secured Credit Cards To Build Credit

How to Choose a Prepaid Debit Card

You can get prepaid debit cards from retailers, banks, credit unions, and online issuers. But while there are similarities between the various cards issued, there are some variables you need to be aware of.

Fees

Fees can vary substantially from one issuer to another. Common fees to be aware of are purchase/activation fees, card reload, ATM withdrawal fees, purchase activity fees, and monthly service charges. You’ll naturally want to favor a card with the lowest fees overall.

But pay particular attention to usage fees. For example, if you plan to use the card frequently, purchase fees can add up. In addition, some cards have some unexpected expenses, like inactivity fees.

Some cards give you an option between a monthly service fee and activity fees. You’ll need to evaluate the number of transactions you expect to run to determine which fee structure works best for you.

Funding/spending limits

Most prepaid debit cards do impose limits. With some cards, the limit is just a few hundred dollars. But others may go well into the thousands. For example, Netspend offers prepaid debit cards with a limit of up to $15,000.

Features

Like bank accounts and credit cards, prepaid debit cards offer a wide range of features. For example, some cards come with Bill Pay, allowing you to pay bills directly from your account. Others may also offer person-to-person transfers. There are even a few that offer purchase rewards.

ATM access

Many prepaid debit cards offer access to fee-free ATM networks. If you’re a frequent ATM user, you’ll want one that offers a large network. Some are in networks of 50,000 ATMs or more. But there may be some with no fee-free access, which means you’ll pay a fee each time you use an ATM.

Reload options

These can include transfers from a connected bank account, direct deposit, paper check or cash deposit into an ATM, mobile check deposit, or reloads through systems available at retailers, like GreenDot and MoneyPak. You’ll want a card that offers at least two or three reload options, just in case your preferred method is unavailable.

Expiration dates

Just like credit and bank debit cards, prepaid debit cards have an expiration date. It’s usually on the front of the card. But if reach the expiration date, you can renew the card, and your account can remain open.

Can You Use a Prepaid Debit Card Anywhere?

Most prepaid debit cards are part of Visa, MasterCard, American Express, or Discover and can be used anywhere those logos are accepted. This differs from gift cards which can only be used at the merchant listed on the card (for example, Walmart or Starbucks).

Prepaid Debit Card Alternatives

If you rely on prepaid debit cards for banking services, there are other alternatives available for you if you have trouble getting a bank account. Even if you have poor credit, many banks do not perform a credit check.

Consider opening an account with a neobank. Neobanks are online banking apps that partner with a traditional bank to provide users with banking services. These accounts are typically online only, so they lack branch access but the fees are much lower than traditional banks.

An example is Chime. Not only do they offer an online checking account, but also interest-bearing savings and plenty of other banking services.

Another example is Axos. Not only do they offer various checking and savings accounts – including rewards checking – but also other services, like business banking.

FAQs

Are prepaid debit cards safe?

Yes. Like bank debit cards, prepaid debit cards require use of a personal identification number (PIN) to access.

How much money can I put on a prepaid debit card?

It depends on the issuing institution. Some will limit funding to no more than a few hundred dollars, while others will go to many thousands.

Do prepaid cards have hidden fees?

Prepaid debit cards have many fees, and typically all are published in the card account disclosure. However, there are unusual fees that you may not expect, like account inactivity fees. It’s important to read the fine print, so you know all the fees associated with a prepaid debit card.

Can you pay bills with a prepaid debit card?

It depends on the features offered by a particular card, but many prepaid debit cards do offer online bill payment capability.

Final Thoughts

Prepaid debit cards have become so versatile and valuable that many people use them, even those with traditional bank accounts and excellent credit. They are great to carry for travel and safe for online purchases. Prepaid debit cards can even be a tool to help you teach your child or teen how to manage money.