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Prepaid Debit Cards: What You Should Know

Banking, Prepaid Debit Cards
Prepaid Debit Cards: What You Should Know

Credit and debit cards aren’t the only plastic out there. Prepaid debit cards have become more popular, and they can be productive tools for managing money. So, how do they work, and should you get one?

What is a prepaid debit card?

A prepaid debit card is an alternative banking card that lets you pay for things as you would with a debit card. You can generally use one wherever its payment network, such as Visa or MasterCard, is accepted. It’s safer and more convenient than using cash. Other names for it include a pay-as-you-go card or, more formally, a general-purpose reloadable prepaid card.

Ready to choose a prepaid debit card?

When you get one of these cards, regardless of whether it’s from a retailer, bank, credit card company or celebrity spokesperson, you’re opening a transaction account held by a bank.

Unlike a debit card, though, you can only spend the amount of money that you put in the card’s account. The prepaid cards usually offer several ways to do this. With some cards, you can also link to a checking account for online transfers.

Who is it for?

Prepaid debit cards can benefit people who have bank accounts and those who don’t. Nearly 10 million U.S. households don’t have bank accounts. For these “unbanked” people, who might not have access to or want a bank account or credit card, a prepaid debit card can be a solution.

For those with bank accounts, these cards can be tools to budget without worrying about overdrawing a checking account. They also can be useful for people on a fixed income, teenagers who get allowances and relatives visiting from other countries.

» MORE: Best online checking accounts

New rules in 2017

Prepaid debit cards are getting more protections thanks to the Consumer Financial Protection Bureau’s new rules.

Once the federal rules go into effect Oct. 1, 2017, prepaid issuers’ disclosures and account summaries will need to provide more clarity about fees and other information — in line with those available on checking accounts and credit cards. Users of prepaid debit cards also will have fraud protections and liability limits on unauthorized charges if cards are lost or stolen, similar to what checking accounts have. And in the rare cases where a prepaid debit card has overdraft services, you’ll receive additional protections.

» MORE: What the new prepaid debit card rules mean to you

Features

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 can sometimes 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 or reload during a given period.

Protections: Reloadable prepaid cards don’t have the liability or fraud protections that federal law requires debit cards to have, though that will change with the new rules going into effect next year. Some cards currently offer purchase protections, but it can be difficult to dispute unauthorized transactions or correct errors. One safeguard many do have is federal deposit insurance, meaning your money is covered if an issuer falls into bankruptcy.

Expiration dates: Prepaid cards have expiration dates, so be sure you’re aware of whether the company will reissue your card. In a recent report by the Consumer Financial Protection Bureau, some consumers complained that they had money on their cards when the expiration date passed but the issuer didn’t reissue cards that included those balances.

Other features: Some prepaid cards let you write checks, pay bills online and have multiple copies of a card for family members. A rare few even offer rewards such as cash back from purchases, similar to what rewards credit cards do.

» MORE: The basics of debit cards

Prepaid cards versus credit and debit cards

Here’s a quick breakdown:

  • Prepaid debit cards — pay before: You load money onto the card via checks, cash or a bank account before paying for things.
  • 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 you pay the money back later.

Limitations of prepaid debit cards

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.

Prepaid cards also don’t automatically come with all the features you’d expect to have with a checking account, including access to an ATM or branch network, online or mobile banking, or bank services such as wire transfers and 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. Just be sure to compare options to find the card with the lowest fees and the best features for you.

Spencer Tierney is a staff writer at NerdWallet, a personal finance website. Email: spencer@nerdwallet.com. Twitter: @SpencerNerd.

Updated Oct. 17, 2016.