How Do Prepaid Debit Cards Work?

Load money in advance onto a prepaid debit card, and then use it at ATMs or to make purchases. You can reload the card in multiple ways.

Spencer TierneyDec 10, 2020
How Do Prepaid Debit Cards Work?
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If you don't have a bank account or you need a new way to budget, prepaid debit cards might be the next plastic for your wallet. Here's how they work.

What is a prepaid debit card and how do I get one?

A prepaid debit card is an alternative banking product that only lets you spend the money you load onto the card. Like debit cards, prepaid cards work at any merchant that accepts its payment network, such as Visa or Mastercard. They’re safer and more convenient than using cash. They’re also known as stored-value cards, pay-as-you-go cards or, more formally, general-purpose reloadable prepaid cards.

You can buy a prepaid debit card from a retailer, bank, credit card company or other financial services provider. When you purchase one, your card funds are usually part of an account held by a bank or credit union.

Prepaid card companies usually offer several ways to load funds onto a card. Some cards also let you link to a checking account to make online transfers.

» Want to find the best prepaid debit cards? Check out our favorite options

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Best for the unbanked or for budgeting

Because many prepaid debit cards don't require credit checks, they're easy to get. If you're in one of the roughly 7 million U.S. households without access to a bank account, prepaid cards can be a solution.

Prepaid debit cards are easy to get because there's no credit check. They also can be useful if you're trying not to overspend. But they have limitations.

If you try spending more than you have, most prepaid cards simply decline the transaction. They can be useful for people on a fixed income or teenagers who get allowances.

But prepaid debit cards have major limitations compared with banking accounts and credit cards. Although they typically have online services, many prepaid cards lack standard banking services, such as a way to withdraw or reload cash for free. The money you load on a card probably won't earn interest, either. If you only want to load cash for safekeeping, and don't plan to make many withdrawals, it may be better to find a high-rate savings account for your funds.

Prepaid debit cards don’t affect your credit, so they won’t help build it, either.

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Prepaid debit cards vs. credit and debit cards

Here’s a quick breakdown:

  • Prepaid debit cards — pay before: You load money onto the card via cash, checks, direct deposit or a transfer from another account before paying for transactions.

  • Debit cards — pay now: You use money directly from a checking account when paying for purchases or withdrawing money from an ATM.

  • Credit cards — pay later: You borrow money from a bank when you use the card and pay the money back later.

» Ready to make a choice? Check out reviews of three prepaid debit cards: Bluebird, Chase Liquid, and PayPal.

How prepaid debit cards work

Prepaid cards vary widely, but they tend to have these features in common:

Reload options: You can usually add money to a card in multiple ways, such as setting up direct deposits, loading cash at participating retailers and depositing checks at ATMs. Some cards also let you make online transfers or mobile check deposits from a smartphone.

ATM access: Some prepaid cards have access to free nationwide ATM networks, such as MoneyPass and Allpoint, or to branded bank networks for cards issued by banks.

Fees: You might have to pay for activating a card, making deposits and using out-of-network ATMs. There’s usually a monthly fee, which sometimes can be waived — by having direct deposits, for example. Some cards charge a fee for every purchase and ATM transaction.

Amount limits: Some cards restrict how much you can withdraw, reload or spend during a certain period, such as a day or month.

You might have to pay to activate a card, make deposits and use out-of-network ATMs. There’s usually a monthly fee. Some cards charge a fee for every purchase and ATM transaction.

Protections: Reloadable prepaid cards have the liability and fraud protections required of debit cards by federal law. Some cards offer purchase protections, but it can be difficult to dispute unauthorized transactions or correct errors. One safeguard many cards have is federal deposit insurance, meaning your money is covered if an issuer becomes bankrupt.

Expiration dates: Prepaid cards have expiration dates. You’ll need to be reissued a card before it expires. Funds on the cards shouldn’t expire, though. In a 2016 report by the Consumer Financial Protection Bureau, some consumers complained that they had money on their cards when they expired, but the issuer didn’t reissue cards that included those balances. If that happens to you, reach out to the prepaid company to see if it can be resolved. If not, you can submit a complaint on the CFPB website.

Other features: Some prepaid cards offer check writing, online bill pay and multiple copies of a card for family members. A rare few even offer rewards such as cash back on purchases, similar to rewards credit cards.

» Think a debit card might be what you need? Read more about the basics of debit cards

Limitations of prepaid debit cards

Recent horror stories: Several prepaid cards have been affected by technological outages that lasted days or weeks. When RushCard’s parent company switched its payment processor to Mastercard in 2015, a technological glitch locked tens of thousands of users out of their RushCard accounts for days. The Walmart MoneyCard experienced an outage in 2016. Netspend settled with a federal regulator over claims that customers were blocked from accessing their accounts, providing refunds to those who were eligible.

No effect on credit: Because prepaid debit cards aren’t credit cards, you can’t build credit with them. For that, you’d want to consider a secured credit card.

Lack of bank services: Prepaid cards also don’t automatically have all the features you’d expect with a checking account, including access to an ATM or branch network, online or mobile banking, or bank services such as wire transfers and the ability to stop payments.

If you want a checking account without monthly fees, consider our list of best free checking accounts. There are also second chance checking accounts for people with bad credit or banking histories.

Whether used as a budgeting tool or as an alternative way to bank, prepaid debit cards can help you store and spend money productively.

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