Prepaid debit cards can be used to buy almost anything, whether you’re shopping online or in person. They may also be a helpful budgeting tool, and they don’t affect your credit. You may even be able to recover your money if you lose the card.
However, prepaid debit cards do have some disadvantages, including possible fees. Learn how these cards work to help determine if a prepaid debit card makes sense for you.
Key Points
- Prepaid debit cards are accessible to most individuals since a credit check is not needed to activate a card.
- Prepaid cards do not help build or improve your credit history as activity isn’t reported to credit bureaus.
- Prepaid debit cards help you control spending and avoid debt, since you can only spend up to the amount loaded on the card.
- Users should be aware of potential fees, such as for activation, reloading, ATM withdrawals, transactions, or inactivity on the card.
- If a prepaid card is registered, it offers some protection from fraud and errors, but issues must be reported quickly.
What Is a Prepaid Debit Card?
A prepaid debit card shares some features of a credit card, debit card, and gift card. It’s a debit card that’s been preloaded with money that you can generally use at any retailer (online or in person) that accepts credit cards.
Like credit cards, prepaid debit cards may be associated with credit card networks. So a prepaid Visa debit card, for instance, can be used anywhere that accepts Visa.
Each purchase you make on a prepaid debit card will deduct from the amount that’s been preloaded onto the card. When you reach the end of your preloaded cash, you can’t buy anything else with the card.
It may be possible to add more money to the card when the balance gets low via cash or direct deposit, depending on the card. However, there might be a fee to reload the card with money.
Pros of Prepaid Debit Cards
Like most financial products, there are pros and cons to consider when it comes to using prepaid debit cards. Here are a few of the benefits.
No Interest or Bills
A prepaid debit card is not a credit card, and you generally can’t carry a balance on it. That means you pay no interest when you use the card, and there is no bill to pay at the end of the month. A prepaid debit card is basically the plastic equivalent of cash.
Limited Loss
It used to be that losing a prepaid debit card was like losing cash — you were out of luck. But legislation by the Consumer Financial Protection Bureau (CFPB) that took effect in 2019 required card issuers to provide protection against fraud and errors. In order to access this protection, you must usually follow instructions to register your card with the prepaid card issuer and report any theft or loss promptly.[1]
Security for Personal Information
While you may need to provide personal information to activate or register a prepaid debit card, the prepaid cards don’t typically carry any of your personal or financial information. So if your card falls into the wrong hands, it’s generally not possible for someone to access your sensitive information. That said, protecting your account number, PIN, and CVV code can prevent others from accessing your balance.
Automatic Budgeting
Prepaid debit cards typically offer a hard stop on spending, meaning that if there’s $100 on the card, you can’t spend more than $100, which can be a helpful tool for managing your money.
For people who have a hard time with impulse purchases or those who are trying to stick to a strict budget, prepaid debit cards may provide a helpful tool to prevent overspending.
There are some prepaid cards that allow account holders to overdraft and spend more than the balance on the card. They may charge a fee for this. If going over the limit is a problem for you, it may be worth considering a card that doesn’t allow overdrafting.
Available to Those With Less-Than-Stellar Credit
There is no credit check required to get a prepaid debit card. This makes prepaid debit cards one option to consider for consumers who are unable to qualify for a traditional credit card.
If your credit is subpar, you can get a prepaid debit card and use it where major credit cards are accepted.
Teaching Tool
Those with children may find that prepaid debit cards could be a useful tool to teach them about money.
Prepaid debit cards could be used by parents to introduce concepts of spending within limits, to help children understand using plastic instead of cash, or to dole out allowances so kids can practice their money management skills.
Spending Tracker
Some cards offer email or text alerts based on card activity, or they’ll notify you when the card has been reloaded or the account balance is getting low.
Possible to Deposit Paychecks
You can have funds (like paychecks) directly deposited onto some prepaid debit cards, skipping the need to manually reload the card as the balance runs low. This could mean that funds are available faster than they would be if you were cashing a paper check.
Cons of Prepaid Debit Cards
Here are a few downsides to consider when it comes to prepaid debit cards.
No Credit Effect
Although there’s no credit check required to get these cards, it means prepaid debit cards aren’t connected to a line of credit like credit cards are.
Because the company that administers the prepaid debit card is not reporting your payment activity to the credit bureaus, these cards aren’t helpful for establishing or strengthening your credit history.
High Fees
Depending on the card, a prepaid credit card may come with a host of attached fees. Some prepaid cards may charge fees for certain activities including:
- Activating the card
- Making a purchase
- Adding money to the card
- Checking the balance on the card
- Withdrawing money at an ATM
- Replacing a lost card
- Foreign transaction fees
- Inactivity after a period of time with no transactions
If you’re considering using a prepaid debit card, you may want to shop around and review the costs and fees associated with different types of prepaid debit cards.
Another option for your money — and one that could help it grow — is to open an online bank account that offers a high yield for your savings. With a bank account, you’ll typically also have access to ATMs and online and mobile banking for added convenience. And some bank accounts come with no fees, unlike certain debit cards.
Potential for Loss
If you don’t register your prepaid card and something happens to it — loss, theft or fraud — there may be no way to recover your cash.
Getting a Prepaid Debit Card
You can purchase prepaid debit cards at a variety of locations, including grocery stores and drug stores, online, or from some banks and credit unions.
Purchasing a prepaid debit card usually requires you to load money onto the card at the time you buy it. For example, if you want to buy a $50 prepaid Visa debit card at the drugstore, you would pay the fee to activate the card, plus the $50 you want to load onto it.
If you’re shopping for cards, pay attention to the card fees, which should be displayed on the card’s packaging. There may also be a toll-free number or website you can visit for complete fee information. To the extent possible, it’s worth trying to find prepaid debit cards with fewer fees.
After purchasing the card, to be protected against fraud, loss or theft of your card, you’ll usually need to register it.
The prepaid card will generally come with instructions for doing this. The card provider may request information such as your full name, contact information, date of birth, and Social Security number or tax ID.
The Takeaway
Sticking to a budget and avoiding excessive spending can be daunting. Balancing your income against your expenses and savings goals takes dedication and commitment.
Fortunately, the right tools can make it easier. Consider choosing a high-yield bank account that allows you to manage your spending and saving all in one place.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is a prepaid debit card and how does it work?
A prepaid debit card is loaded with a specific amount of money you can use for purchases, generally wherever credit cards are accepted. Each transaction deducts from the preloaded balance. You can’t typically spend more than what’s on the card, though some cards allow you to reload funds. It functions similarly to a debit card but isn’t linked directly to a bank account.
Do prepaid debit cards help build credit?
No, prepaid debit cards do not help you build or establish credit. Since they are not a line of credit, your usage and payment activity are typically not reported to the major credit bureaus. Therefore, they don’t impact your credit score.
What are the main advantages of using a prepaid debit card?
Prepaid debit cards are accessible to most individuals, since a credit check is not necessary. They can also help you stick to a budget, since you typically can’t spend more than the balance on the card, which helps to avoid interest charges, as well. Prepaid cards also offer fraud protection if they’re registered and the loss is reported promptly, and some of them can even receive direct deposits.
Article Sources
- Consumer Financial Protection Bureau. Prepaid Cards: Know your rights.
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