What Is a Prepaid Debit Card?

You know about credit cards and debit cards, and you may even be familiar with secured credit cards, but did you know there’s another option out there? Millions of Americans rely on prepaid debit cards to handle their finances, and they have plenty of reasons to do so.

A prepaid debit card works just as you’d expect: after acquiring a card, you load it with money. As you spend, money is deducted from your balance. When your balance is depleted, you need to reload your prepaid debit card and start the process over.

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Prepaid cards work well for many people. Still, they’re not right for everyone — and there are definite drawbacks. This article will provide some objective details about prepaid cards: the good, the bad, and the ugly. With this information, you can assess whether a prepaid card is a good fit for you.

In this article

    Who Can Benefit from a Prepaid Card?

    With so many other financing options on the market, you’re probably wondering why someone would use a prepaid debit card in the first place. If they were using a credit card instead, for example, they would have access to a line of credit they can repay over time and potentially earn rewards. With a traditional debit card, on the other hand, the money they spend would be deducted directly from their bank accounts.

    So, why a prepaid debit card? Here are a few scenarios where a prepaid debit card makes sense:

    1. You don’t want a traditional bank account. If you are one of the millions of Americans seeking an alternative to traditional banking, prepaid cards can essentially take the place of the basic functions of a bank. You’ll be able to hold your funds, keep track of your balance, and spend as needed.
    2. You have bad credit or no credit history. Prepaid cards are often chosen by people who might not qualify for a standard credit card. Since you can only spend as much as you have on the card, the issuer incurs very little risk. For that reason, they are typically willing to provide cards to people with any credit profiles.
    3. You want a card that won’t let you overspend. If you are looking for an effective budgeting tool. Unlike with standard credit cards, a prepaid card won’t allow you to carry a negative balance. When the money’s gone, it’s gone; that can help you stay on budget and avoid debt accumulation.
    4. You want a credit card one day but need time to practice first. Prepaid cards can be a good low-risk introduction to the world of credit cards and personal finance.

    If any of the above categories apply to you, you may be able to benefit from a prepaid debit card. Keep reading to learn more about the advantages and disadvantages of taking this route.

    What Are the Advantages of a Prepaid Card?

    Like most financial tools, prepaid credit cards have both benefits and drawbacks. Here are a few of the biggest upsides you’ll find when you start using prepaid debit cards in lieu of other, more traditional forms of payment.

    • Prepaid debit cards help people avoid debt. For those who have problems with compulsive spending, prepaid cards can be a great option. Again, you can’t spend more than what you put in!
    • Putting money on your card doesn’t require a lot of work. Reloading prepaid cards is usually a very simple process.
    • You can qualify for a prepaid debit card regardless of your credit history. Prepaid cards do not require a credit check. This is important as it gives people with bad credit a simple way to pay for things with plastic, like online purchases or bill payments.
    • You can use your prepaid card like a bank account in some cases. Many employers are happy to deposit your paycheck directly onto your prepaid card.

    What are the Disadvantages of Prepaid Debit Cards?

    Unfortunately, prepaid cards aren’t all sunshine and roses. In fact, prepaid cards have earned something of a bad rap — especially after recent press about some employers using prepaid cards in lieu of traditional paychecks.

    Let’s look at the drawbacks you’ll want to consider before obtaining a prepaid card. Keep in mind that not all prepaid cards operate the same way, so you should invest some time in selecting one with as few of these downsides as possible.

    • Prepaid debit cards don’t really help you build credit. Any bill payments you make with your prepaid card may get reported to a credit reporting agency called the PRBC, but not to Experian, TransUnion, and Equifax – the credit agencies that make up your FICO score. For all intents and purposes, your FICO score is your credit score: used for getting a credit card, car loan, mortgage or lease. So if you’re interested in improving a poor credit score, you should look at secured credit cards instead of prepaid cards.
    • Most prepaid debit cards charge a lot of fees. While standard credit cards make money based on interest rates, prepaid credit cards don’t have interest rates. That means they need to make their money elsewhere, and in this case, it’s via hidden, and often steep and plentiful, fees. With many prepaid credit cards, you can expect the pay an initial setup fee, a monthly maintence fee, fees for using an ATM, fees for reloading your card, and more.

    The Best Prepaid Cards

    Despite the drawbacks, many people find that prepaid cards are the best choice for their financial management. If you’re one of these people, we’ve compiled a list of the best prepaid cards. These cards feature minimal fees and are easy to use.

    Make sure to check the card issuer’s website for details about terms and conditions of offer.

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