What Is a Prepaid Card?

What Is a Prepaid Card? article image.

A prepaid debit card is a card that can be used for payment—but unlike a credit card, it won't help you build credit. It's also not the same as a debit card you receive from your bank. To use a prepaid debit card, you'll load money onto the card and can then make purchases from merchants or withdrawals from ATMs up to the amount you've deposited.

Unlike a traditional debit card, you don't need a bank account to get a prepaid card; you can have a paycheck or government benefits directly deposited to it, or load cash onto it at participating reload locations. That makes a prepaid card a viable option for consumers without a checking account.

A prepaid debit card is also different from a traditional credit card. You won't need to undergo a credit check to get a prepaid card, and you're not able to charge more than you have loaded onto the card. Prepaid cards can, however, come with high fees, such as monthly maintenance, ATM and reloading fees. It's important to weigh the pros and cons before getting one. Here are the basics to know about prepaid debit cards.

How Do Prepaid Debit Cards Work?

While prepaid cards look a lot like traditional credit cards or debit cards—and many credit card issuers, like Visa, American Express and Mastercard, offer them—the similarities end there. The biggest difference is that a prepaid card must be loaded with funds before you can use it.

Prepaid cards are sold at retailers like supermarkets and gas stations, and you can also order them online or get them at participating banks. You can specify the amount of money you want loaded on the card, though there may be daily, weekly or total limits to the amount you can add (these limits may be waived when you receive a direct deposit of funds to the card). Cards may be for one-time use, like gift cards, or reloadable.

Unlike a credit card, you don't need to pass a credit check to receive a prepaid debit card. You won't pay interest on purchases, because they'll be debited from the amount you've added to the card. These cards don't allow you to carry a balance or to pay off your purchases over time.

Prepaid cards also come with multiple fees to watch out for, such as fees for activating the card and loading and spending money, which you may not find on a debit or credit card. You could also pay fees for monthly maintenance, some ATM withdrawals and international transactions.

Do Prepaid Cards Build Credit?

Another difference between prepaid debit cards and credit cards? Prepaid cards will not help you build credit. In this way, they're more like traditional debit cards associated with a bank account. Your payments will not be recorded on your credit report, and your use of the card will not affect your credit score.

There may be other reasons to get a prepaid debit card, such as limiting spending, giving a child an allowance or enjoying the convenience of paying with a card rather than cash. But if you have no, poor or fair credit and you'd like your card usage to help improve it, consider an alternative to a prepaid card, such as a secured credit card.

Secured cards function like a regular credit card, except that you are required to make a deposit, which typically becomes your credit limit. Unlike a prepaid debit card, you can't use that deposit to pay for purchases or your bills; it's essentially a safety net for the lender in case you stop making your card payments. In most cases, the credit card issuer reports your secured card's activity to the credit bureaus, so limiting purchases and paying off your balance in full each month by the due date will help you improve credit. Your secured card's payment history and credit utilization will be reflected on your credit report and score, unlike a prepaid card, and will help you rebuild or establish a credit history. Eventually, you may get your deposit back or be able to transition to an unsecured card.

How to Choose a Prepaid Card

If you decide a prepaid debit card would work well for you, first consider how you plan to use it. Depending on how you want to load it with money—by direct deposit only, for example, or with cash—search for cards that make that method as easy and low-cost as possible. Also identify whether you need to use the card for ATM withdrawals or online bill payments, and check what fees you will be charged for those features.

For example, some prepaid cards charge a high fee for ATM use, but will waive those fees at machines that belong to a certain network. Other prepaid cards will waive monthly fees for those who regularly use direct deposit, or who load a certain amount of funds each month.

Finally, check for additional prepaid card features that may be valuable. For instance, some prepaid cards allow you to order additional cards for authorized users and set limits on their use. This can be useful when you'd like to give other family members the ability to use the card up to a certain limit.

One of the lowest-fee prepaid debit card options available is the Bluebird® American Express® Prepaid Debit Account, which charges no fees for monthly maintenance, foreign transactions, cash reloading at Walmart locations, in-network ATM withdrawals, card transactions or inactivity. For parents interested in overseeing how their kids spend money, Greenlight offers a prepaid card that comes with an app for both parents and kids to monitor balances and spending patterns. It comes with a monthly fee.

How to Use and Reload a Prepaid Card

Since they're typically part of a payment network such as Visa, Mastercard or American Express, prepaid cards can be used to make purchases at any merchant that participates in that network. Each time you use a prepaid card, it will authorize a purchase up to the amount of funds remaining on the card, but not more. If you don't have sufficient funds loaded on the card to make a purchase, the transaction will be declined.

Prepaid cards generally can also be used to withdraw cash from ATMs, but fees may be charged. To use your prepaid card at an ATM, you'll create a four-digit personal identification number (PIN), like you would with a debit card. You can also use your PIN to make certain transactions that require a debit card. Additionally, some prepaid cards allow you to make online bill payments.

Typically, you can load a prepaid card using the following methods:

  • Cash
  • Debit card
  • Transfer from checking or savings
  • Direct deposit from your employer
  • Check
  • Transfer of government benefits, including a tax refund.

It's less likely you'll be able to load a prepaid debit card using a credit card.

Making the Best Use of a Prepaid Card

While prepaid cards can be convenient in certain situations, such as for giving a teen an allowance and introducing them to banking, prepaid card fees can make them a pricey choice.

Before opting for a prepaid card to receive government benefits or direct deposit, make sure you clearly understand what fees you'll be charged and how you can cheaply and easily reload the card if you want to. A secured credit card, or skipping the prepaid card and opting for direct deposit to a bank account, may be better choices.

All information about the Bluebird® American Express® Prepaid Debit Account has been collected independently by Experian and has not been reviewed or provided by the issuer of the card.

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