What is a Prepaid Card? How Reloadable Options Compare to Credit and Debit Cards

I’ve received countless prepaid cards as gifts over the years. I loved them because they usually had the Visa or Mastercard logo and I could use them anywhere, unlike gift cards. But after I used them to check out online, I would just forget about them and move on.

Back then, I didn’t know how versatile they were — and how they could even help people budget and spend within their means.

Prepaid cards (sometimes referred to as prepaid debit cards or prepaid credit cards) are physical cards that are pre-loaded with funds. You can use them to make purchases both in-store and online, and you can often find prepaid cards at grocery stores, warehouse clubs, and even online retailers. Seriously, these things are everywhere, and they’re massively convenient.

You load funds onto a prepaid card and can use it practically anywhere you can use a credit card. But prepaid cards don’t allow you to spend more than what you load onto them, and they don’t help you build credit.

Prepaid cards can help people who can’t qualify for credit cards or who don’t have access to bank accounts spend money more conveniently. They can also ensure you don’t overextend yourself financially and rack up debt. However, they do have some drawbacks, so let me take you through what I’ve learned about how prepaid cards are more than just last-minute gifts.

If you haven’t used prepaid cards before, you may be in for a surprise. These cards may look just like regular credit or debit cards, but they have a completely different set of rules.   

Key Features of Prepaid Cards

The biggest benefit to opening and using a prepaid card is its ease of use. You can buy a card online or in a physical store, load it with funds, and use it immediately. I can think of several places within a five-minute drive where I could buy a prepaid card: CVS, Walgreens, my grocery store, and tons of gas stations.

You can use a prepaid card to pay your bills, as long as they accept your card issuer. Most prepaid cards use Visa or MasterCard, so you can use it wherever those cards are accepted. 

Normally, if you want to get a new debit card, you’ll have to visit your bank in person. However, they may not be able to give you a card immediately. Getting a new credit card is even worse. It may take seven to 10 days unless you can get them to expedite it. 

There are much fewer limitations on who can get a prepaid card. You can get your own prepaid card as long as you’re 18 (or 19 in some states). Just walk into the store and buy one. Worst case scenario: they’re behind the cashier counter instead of on the gift card rack. 

There are two basic types of prepaid cards: reloadable and non-reloadable. Reloadable cards let you add more money to them after you’ve spent the initial amount, while non-reloadable cards do not let you add more funds to them.

When you buy a reloadable prepaid card, you may have to provide identifying information, including your full name, date of birth, and contact details like your phone number and email address. You may also have to provide your Social Security number.

If you don’t have a Social Security number, you can provide an alternative tax identification number. Don’t worry — they’re not going to run a credit check.

To load the card, you can put money on it in several different ways, including setting up direct deposits or making in-store cash deposits. There’s no wrong way to do it — it just depends on what you’re more comfortable with or what’s easier for you.

When you load the card, there may be a minimum amount that you must deposit on the card. This is known as the minimum load and usually starts around $300. Different cards have different account maximums, with some allowing up to $100,000 to be deposited on a card.

However, I personally don’t recommend making a six-figure deposit on a prepaid card. At that stage you really need to get a bank involved.

Many banks and credit unions also provide prepaid cards. These may have fewer fees than other types of prepaid cards. If you have an account through a bank or credit union, I recommend reaching out to them and seeing if they provide prepaid cards. 

Prepaid Cards vs. Credit Cards

The biggest difference between a prepaid card and a credit card is that you don’t need to go through a credit check to open a prepaid card. Most credit cards look for people with a credit score of 670 or above, which is classified as a good score. If your score is below that threshold, you may have a hard time getting a credit card.

Unfortunately, it’s harder to spend money on a prepaid card. You can only spend as much as you have deposited. If I open a prepaid card and deposit $500, I can only spend $500. This can be a good thing: there’s no way to overspend, after all. However, if you’re not planning on using this as a budgeting tool, it’s a real pain.

Credit cards, on the other hand, have a credit limit, which is the amount a card issuer lets you charge on the card. Credit card limits can start as low as $250 or can exceed hundreds of thousands of dollars. It all depends on things like your credit score, type of credit card, and income.

Most people assume that credit cards are generally more expensive to have than prepaid cards, but that depends on how you use the card. While credit cards charge interest if you don’t pay off your balance every month, they also offer more cash back and reward options. You can’t get a free first-class upgrade from a prepaid card, that’s for sure.

Plus, if you’re planning on traveling anywhere, a credit card can help you avoid costly foreign transaction fees. I have saved so much money by booking flights with credit card points and miles.

Another huge downside to prepaid cards is that you don’t have as much purchase protection. When you buy some with a credit card, you can file a chargeback if the product doesn’t work, is never delivered, or breaks before the warranty expires. 

Credit cards give you more peace of mind, especially for large-ticket items. Prepaid cards don’t provide those same benefits. In an era of internet scams, I love having the protection that a credit card provides. 

Prepaid Cards vs. Debit Cards

There’s one thing in common with both prepaid cards and regular debit cards — you can only spend money that you actually have. Unfortunately, the comparison mostly ends there. While prepaid cards are often referred to as prepaid debit cards, they’re not the same as traditional debit cards. Regular debit cards are much more popular than their prepaid brethren.

A prepaid card is not linked to a bank account. If you want to spend money on a prepaid card, you first have to deposit the funds directly onto the card. 

A debit card is usually tied to a checking account but may also be linked with a savings account. When you shop with a debit card, the money will be withdrawn from the associated bank account. This makes debit cards a touch more dynamic, depending on your bank. It’s usually easier to set up direct deposit with a bank, and transferring funds is usually a lot easier as well. 

Debit cards usually have lower fees than prepaid cards. For example, if you don’t use a prepaid card for a certain period of time, you may encounter an inactivity fee. Debit cards don’t usually charge those kinds of fees. Your bank might charge a dormancy fee if there’s no account activity (for instance, if no money is deposited for a certain period), but that’s independent of your debit card. 

However, prepaid cards usually don’t come with overdraft fees, unlike debit cards. An overdraft fee is when you spend more money on your debit card than you actually have in your bank account. If the transaction goes through, your bank will front the money and charge you an overdraft fee.

The fees you’ll encounter vary from bank to bank; some won’t charge you anything so long as you majorly overdraft your account. Others charge $10 to $40 dollars. Some charge a lot more. All of those fees are on top of repaying the money the bank fronted you, so they can add up quickly. 

On a prepaid card, you usually can’t overdraft at all. The transaction will just decline. This can be a little embarrassing, but people are usually more understanding when it’s what they perceive as a gift card being declined. Just make sure you have a backup payment method on hand.

Still, prepaid cards make up for the lack of overdrafts with other fees; you could end up paying for every transaction you make. Unlike an overdraft, there’s no way to avoid that. You’re stuck eating the extra cost no matter what. 

In general, if you’re trying to pay as few fees as possible, I suggest using a debit card instead of using a prepaid card. 

There are several different kinds of prepaid cards on the market. Here’s how I like to categorize them:

General Purpose Reloadable Cards

The most common type of prepaid card is a general reloadable card. These can be used almost indefinitely, as long as you have funds on the card and can pay any associated fees. 

Reloadable cards can be loaded multiple times, but you’ll likely have to pay a fee each time. You can use these cards for both in-person and online shopping, as long as the retailer accepts prepaid cards. 

Gift Cards

One of the most common types of prepaid cards is a gift card. Gift cards can come from specific retailers or from parent companies that own several stores. The biggest difference between a gift card and a reloadable prepaid card is that gift cards often don’t let you add more money once the card hits a zero balance.

There are some other major differences: gift cards usually only work at one retailer or at a group of related businesses. You can’t use an Amazon gift card to shop at Target, for instance. These cards also tend to come in fixed denominations, though this can vary. 

If you want to put more money on a gift card, you may have to buy a new physical gift card. You can also get an electronic gift card that will be sent to your email address. Gift cards can often be used either online or in-person, depending on your personal preference.

Gift cards are one of the most popular presents, especially if you’re an adult who’s notoriously hard to shop for. I remember getting gift cards from relatives during the holidays because it was easier than buying a dress that was the wrong size or style.

Also, sometimes retailers will give consumers who spend a certain amount their own gift cards. If you return an item without a receipt or beyond the normal return window, you may also receive a gift card instead of a refund on your original payment method.

I’ve even heard of some people using gift cards as a way to budget. For example, if you want to limit yourself to spending a certain amount at Target, you just buy a Target gift card for that amount. When the gift card is gone, that’s it; no more shopping spree. 

Payroll Cards

Most companies issue paychecks via direct deposit, which is when the money is automatically deposited in your bank account. Some jobs still provide checks to employees (how retro!), but there are some that offer payroll cards. These are prepaid cards your employer issues you, which they load with funds every pay period.

You can also get your own prepaid card and transfer your direct deposit to it. In fact, some prepaid cards may even let you access your direct deposit money up to two days early, depending on when your employer submits the direct deposit information.

This can help consumers get money faster so they can pay their bills and avoid taking out a costly payday loan.

Using a payroll card may be easier than getting a check, since you get immediate access to the funds.

However, I still think direct deposit is the way to go if your company offers that as an option.

App Prepaid Cards

There are also some prepaid cards that use money from an app to fund the card.

For example, the Cash App prepaid card uses money from your Cash App account. PayPal and Venmo also have their own prepaid cards that draw money from your account.

While a lot of businesses are starting to accept app payments, there are way more that don’t.

These cards make it easier to spend your money without pulling out your phone, and they can come with extra perks like bill splitting.

Plus, they have all the same benefits as prepaid cards: unless you have your account set to reload automatically, you can only spend what you’ve deposited.

There are a lot of ways you can use a prepaid card, and tons of benefits to doing so.  Here are some of the top perks, in my opinion:

Benefits

As you’ve probably noticed, many retailers have stopped accepting cash. How many times have you gone to Walmart or something, only to see a grand total of one cashier accepting bills? Never mind all the germs you can find on physical money (ew). Like it or not, you need a card to shop.

One of the best reasons I can think of for using a prepaid card is if you use a cash budgeting system. Since many retailers stopped using cash because of the pandemic, it’s getting harder to use it as a budget tool. However, using a prepaid card can have the same effect since you can’t spend more money than is on the card. 

For example, let’s say you’re trying to stick to a $200 grocery budget. You can load your card with $200 and go to the grocery store. Purchases above this amount will be declined. I can see how this system can help people who have chronic spending problems. 

However, if you’re worried about going over your budget, you can use a cash budgeting system instead of a prepaid card. Also, you can use apps like Qube, which is like a digital cash budgeting system that comes with a special debit card. You’ll approve how much you can spend and then unlock the card so you can use it at a store or online retailer.  

Prepaid cards can be a good option for people who aren’t eligible for credit cards or debit cards. Ineligible individuals may include recent immigrants, those with bad credit, or those who’ve had negative experiences with bank accounts before. 

Also, some consumers who are worried about privacy use prepaid cards to avoid having their transactions tracked. However, if you’re worried about that, then you may want to only use non-reloadable prepaid cards. In my personal opinion, this isn’t a good enough reason to use prepaid cards over regular debit or credit cards, but you do you.

Some prepaid cards also provide free ATM withdrawals within a certain ATM network. If you use an ATM within that network, you won’t be charged a withdrawal fee. 

Some prepaid cards even have FDIC insurance, just like a regular debit card. FDIC insurance means that the money on the card is insured, no matter what happens with the prepaid card issuer. If you’re going to rely on a prepaid card, I highly suggest finding one with FDIC insurance — the gold standard for all debit cards.

Drawbacks

Even though prepaid cards are simple to use and easy to set up, there are several downsides you should be aware of.

First, having a prepaid card often means dealing with an onerous fee schedule. In my professional opinion, you should always pay as few fees as possible, even if that means not using a prepaid card.

Many prepaid cards charge activation and load fees, which can eat away at your funds. These fees are often higher than what you’d see with a traditional debit or credit card.

• Monthly fee: This fee is charged every month until an account is closed. This fee may be charged even if you don’t have any money on the card. Some card issuers waive the fee if you have direct deposit set up. 
• Transaction fee: In lieu of a monthly fee, some cards charge a fee every time you use them. If you rarely use the card, this might be preferable to a monthly fee, but it can also add up quickly.
• Balance inquiry fee: Some prepaid cards will charge a fee if you check the balance. Yes, just checking the balance. Try to avoid these ones.
• Reload fee: If you have a reloadable card, you may have to pay a fee every time you add more money to the card.
• Inactivity fee: This is a fee you’ll have to pay if you don’t use the card within a certain time period. 
• Card replacement fee: While some prepaid cards can be replaced if they’re lost or stolen, the issuer may charge an extra fee for sending out a new card.

The biggest potential problem with a prepaid card is what happens if it’s lost or stolen.

If you lose a debit card or credit card, you can simply call the provider and have the card canceled. This is a fairly straightforward process — speaking as someone who has had their card stolen a couple of times.

If someone tries to use the card, they won’t be able to. However, the process is much harder with a prepaid card. If you don’t call the issuer right away, someone could spend your money easily. Plus, there’s often no name associated with a prepaid card, so there are fewer security protections to rely on.

When you have a prepaid card, the transactions you make will not show up on your credit report. This means that you won’t receive any credit for paying your bills on time. If you want to apply for a loan in the future, you’ll need to boost your credit score. As a credit expert, I know it can take years to build a solid credit score. Nowadays, you need to have good credit, unless you’re independently wealthy. A prepaid card won’t help you there.

Some prepaid cards require verification and can take between seven to 10 business days to receive, just like the time frame for a regular debit or credit card. 

Picking a good prepaid card isn’t as simple as it sounds. With so many cards on the market, it can be confusing to select the right one for your financial situation.

Understand Fees and Charges

One of the biggest things I think you should know about prepaid cards is the fee schedule. Every prepaid card has a list of fees that they charge. These lists are easy to find, and you should absolutely review them before you sign up. Check carefully, because some prepaid cards charge an exorbitant number of fees, while others are much more reasonable. 

Some cards will waive their monthly fee if you have direct deposit set up with the card, just like a regular debit card. If you use prepaid cards almost exclusively, then you need to be careful about what kind of card you choose to minimize your costs. 

Some fees are avoidable as long as you follow the rules, while others are not. Monthly fees are the most common culprits.

While some banks do charge a monthly fee for debit cards, prepaid card monthly fees are often higher and harder to avoid. In an era where prices are increasing for everything, I don’t think it makes sense to spend money on unnecessary prepaid card fees. 

Also, if you still rely on cash, then try to find a prepaid card with a large ATM network. This will let you take out cash without having to pay extra fees. Trust me, it’ll save you some huge headaches later.

Review Terms and Reload Requirements

When you initially buy your prepaid card, you will have to load money onto it before using it. Then, once the money runs out, you will have to reload the card if you want to keep using it. If you’re about to run errands and discover your card is out of money, that can be a hugely embarrassing moment. Make sure to understand how to reload the card, and any associated requirements. 

For example, some cards charge a separate fee any time you load money onto the card. If that’s the case, you may want to load the maximum amount you’re comfortable with to minimize any fees. However, this also means that the funds are now locked onto the card. If you need to use the money for something else that doesn’t accept a prepaid card, you may be in trouble.

Look for Additional Features

When comparing prepaid cards, you should look for cards that offer additional perks and benefits. For example, some prepaid cards provide cash back rewards, just like debit and credit cards. This means you’ll earn extra points or cash back when you use the card at participating retailers. 

If you’re choosing between multiple prepaid cards that offer cash back, try to find one that gives you your rewards as soon as possible. Some prepaid cards have a several-month lag to issue rewards. Only certain types of transactions, however, may be eligible for cash back. 

Try to steer clear of celebrity-branded prepaid cards. These have largely gone the way of the dodo thanks to their exorbitant fees, but there are still a few branded cards out there. Stick with ones from the major credit companies, and don’t pay more than you have to. 

If you’re interested in getting a prepaid card for a family member to use regularly, you can choose a prepaid card that lets you transfer money automatically on a set schedule. This can help ensure that your loved one always has enough money without them having access to a debit card or credit card. These are great if your kid is in college or overseas. Some are even linked to specific retailers, so you can ensure they’re only spending their grocery budget on, you know, groceries. 

Some sophisticated prepaid cards will even give you a list of transactions online so you can view your purchases and budget for them accordingly. 

Some prepaid cards can be a good alternative if you’re not eligible for a credit card or a debit card. However, like any other financial tool, not every card is created equally. 

Take some time to do basic research and find the right prepaid card for your financial needs. But for most people, a prepaid card may not be the best option. You’d likely be better off with a debit or credit card — if you can get one.