What are prepaid cards?
Prepaid cards, also known as prepaid debit cards, are an alternative to credit cards and cash. They allow you to load money onto a card and then use it to make purchases online and in stores, withdraw cash from ATMs, and more. The main difference between prepaid cards and debit cards is that prepaid cards are not linked to a bank account. You simply load money onto the card and can spend up to that amount. Once the funds are used up, you’ll need to reload the card to continue using it.
Some key things to know about prepaid cards:
- They are not tied to a bank account – you prepay or “load” funds onto the card
- They can be used to shop online, in stores, withdraw cash from ATMs, etc. like a debit card
- Spending is limited to the amount preloaded onto the card
- Cards must be reloaded once the balance is used up
- Some offer features like rewards points, bill pay, etc.
- Most do not allow overdrafts or negative balances
Prepaid cards come in different forms including single-use gift cards, rechargeable cards for personal use, payroll cards issued by employers, and federal benefit cards for programs like unemployment and Social Security.
Some popular prepaid card providers include Green Dot, Netspend, American Express, Chase, and Bluebird by American Express. Many large retailers like Walmart and CVS also offer prepaid cards.
Advantages of prepaid cards
There are several potential benefits that make prepaid cards an attractive option for some consumers:
More budget control
With prepaid cards, it’s impossible to spend more than what’s loaded onto the card. This helps consumers avoid overdraft fees and makes it easier to stick to a budget. Once the balance is depleted, the card simply declines until it is reloaded again.
No credit check
Since prepaid cards are not tied to a line of credit, there is no credit check required to get one in most cases. This makes them easily accessible, including to teens, college students, and those trying to rebuild credit. Most providers only require basic information like name, address, date of birth, and Social Security number.
Safer for shopping online
For shopping online at unfamiliar sites, using a prepaid card can be safer than providing your main bank debit or credit card number. That way, even if the site were compromised, thieves wouldn’t be able to drain your primary accounts.
No debt or interest
Prepaid cards do not allow cardholders to spend more than the balance on the card, so they will never incur expensive credit card interest rates or go into debt. However, not reloading the card means no longer having access to the funds.
Teach financial responsibility
Giving a prepaid card to a child or teenager can be a good way to teach them about financial responsibility without the risks of a traditional bank account or credit card. Parents can load money for the child to learn to budget and spend wisely.
Avoid bank account fees
Basic bank accounts often charge monthly maintenance fees, overdraft fees, minimum balance fees, and more. Prepaid cards with no links to bank accounts help holders avoid common bank account fees.
Accessibility
Prepaid cards may provide an affordable option for those who don’t qualify for a checking account or credit card, such as customers with a previous history of bounced checks or a poor credit score.
Anonymity
Since prepaid cards don’t require a credit check or bank account link, they allow for greater anonymity compared to debit and credit cards. However, know that providers must still verify your identity per anti-money laundering laws.
Potential disadvantages of prepaid cards
While prepaid cards offer some upside, there are also some potential drawbacks to consider:
Upfront outlay of cash
With prepaid cards, you have to put money on the card before you can spend it. This means you need upfront cash. Reloading the card also requires ready access to cash. With bank accounts, your paycheck or other deposits go straight in.
Possible fees
Many prepaid cards charge fees like monthly maintenance fees, ATM withdrawal fees, fees for paying bills, balance inquiry fees, etc. These can add up over time and eat into your balance. However, there are fee-free options available.
No interest earned
Unlike bank accounts, prepaid card balances do not earn interest over time. While your money is on the card, it misses out on potential interest growth.
Lack of protections
Bank accounts come with protections like FDIC insurance and fraud liability protections. Prepaid cards may lack some of these safeguards that could leave you vulnerable in cases of errors or theft. However, some do offer protections like zero fraud liability guarantees.
Harder to get cash
While bank account holders can withdraw cash from any affiliated ATM, prepaid cards may only work at certain ATMs. This could mean having to search for a compatible ATM that may charge a fee for withdrawals.
Card could be lost/stolen
If you lose your prepaid card or it is stolen, the money on the card could be difficult to recover. Some providers offer protections in these cases, but others may not safeguard your balance.
Limited acceptance
While vastly improved, there are still some merchants who do not accept prepaid cards. This is rare with major stores and online shops, but a possibility with smaller retailers.
Are prepaid cards right for you?
So should you get a prepaid card? Here are some instances when a prepaid card may be a good fit:
- You struggle with credit card debt and want to only spend what you can afford
- You have a poor credit history or don’t qualify for a checking account
- You want to shop online but don’t feel comfortable using your bank card
- You want to give your teenager a card with spending limits
- You need a simple, low-fee way to make purchases and payments
- You want better control and visibility into your spending
Prepaid cards may be less ideal for those who:
- Don’t want to prepay for purchases upfront
- Prefer to earn interest on account balances
- Want extensive fraud protections and liability limits
- Make frequent cash withdrawals or card payments
Ultimately, whether a prepaid card makes sense often comes down to your financial situation. For some, the benefits outweigh the downsides. Be sure to compare fees, features, protections and access when shopping for a prepaid card to find the best fit.
Tips for choosing a prepaid card
If you decide a prepaid card is right for your needs, keep these tips in mind when selecting a card:
- Compare fees – Look for low (or no) monthly fees, load fees, purchase fees, ATM fees, etc.
- Check card limits – Make sure the maximum balance and transaction limits fit your needs.
- Look for fraud protections – Opt for cards with zero liability policies in case of unauthorized charges.
- Consider reload options – See what reload methods are available like cash, direct deposit, mobile apps, etc.
- Check associated accounts – Some cards offer linked savings accounts to earn interest.
- Review access – Make sure the card can be used virtually everywhere you plan to shop and pay.
- Consider rewards – See if you can earn cash back, points or perks with purchases on certain cards.
Doing your homework is key to finding the best prepaid card choice with the features, fees and policies that align with your usage and needs.
Top prepaid cards
To give you a sense of the top options, here is a comparison of several leading prepaid cards:
| Prepaid Card | Monthly Fee | ATM Withdrawal Fee | Purchase Fee | Load Fee | Fraud Protection |
|---|---|---|---|---|---|
| Green Dot | $0 (with qualifying activities) | $2.50 (out of network) | $0 | $4.95 (retail loads) | Zero liability |
| Netspend | $0 or $9.95 | $2.50 | $0 | $4.95 | Zero liability |
| American Express Serve | $0 | $2.50 | $0 | $0 | Zero liability |
| Bluebird by Amex | $0 | $2.50 | $0 | $0 | Zero liability |
As you can see, many of the mainstream prepaid cards have similar fee structures but may differ in the details. So it pays to thoroughly compare your options.
The bottom line
Prepaid cards offer a flexible spending option with unique benefits suited to some financial situations. Just be sure to weigh the pros and cons against your own needs. Compare all fees and policies to find a prepaid card that maximizes affordability and utility based on your usage. With a little homework, prepaid cards can provide an on-budget way to shop and pay without the risks of overspending.
