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How Do Prepaid Debit Cards Work?

Banking, Prepaid Debit Cards
How Do Prepaid Debit Cards Work?

Credit and debit cards aren’t the only plastic out there. Prepaid debit cards have become more popular than they used to be, and they can serve as productive tools for managing money. So, how do these prepaid cards 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 transactions as you would with a debit card. You can generally use a prepaid card wherever its payment network, such as Visa or Mastercard, is accepted. It’s safer and more convenient than using cash. It’s also known as a pay-as-you-go card or, more formally, a general-purpose reloadable prepaid card.

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When you get one of these cards — 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 spend only the amount of money that you put in the prepaid card’s account. The 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 as well as those who don’t. About 9 million U.S. households didn’t have bank accounts in 2015, the most recent data available. For these “unbanked” people, who might not have access to or might 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.

But prepaid debit cards have major limitations compared with checking accounts and credit cards. Although they typically have online services, many prepaid cards lack standard bank services, such as a way to withdraw or reload cash for free. They also don’t affect your credit, so they won’t help build it either.

» MORE: Best online checking accounts
» MORE: What new prepaid debit card rules mean for you

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.

Protections: Reloadable prepaid cards don’t have the liability or fraud protections that federal law requires debit cards to have, though that may change with new rules in the next year. 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 after it expires. Funds on the cards don’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 what rewards credit cards do.

» MORE: The basics of debit cards

Prepaid cards vs. 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 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

Limitations of prepaid debit cards

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 recently agreed to settle with a federal regulator over claims that customers were blocked from accessing their accounts.

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 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. Compare options to find the card with the lowest fees and the best features.

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

Updated April 21, 2017.