Comparing Prepaid Card Offers
A prepaid card is a great tool for someone who needs a little help budgeting, doesn’t have the best of credit or prefers the convenience of not always pulling out cash. But they aren’t the same as credit cards and they don’t enjoy credit cards’ greatest advantage – the ability to help build your credit. That said, there are plenty of good reasons to get a prepaid card. Here we look at:
We look at who can benefit from a prepaid card, how they work and what they aren’t.
What is a prepaid card and how does it work?
Prepaid cards are among the fastest growing financial products on the market. General-purpose, reloadable prepaid cards have grown from a $1 billion purchase volume in 2003 to an expected $352 billion by 2023.
Yet, as popular as they are, there is a ton of misunderstanding about them. For example, there is no such thing as a prepaid credit card. In fact, they are opposites. Here we take a look at some common features of prepaid cards and how they compare to other card types.
What are the different types of cards?
Here are the 4 main types of cards you’ll encounter when looking for a financial card, along with how they work and what makes them unique.
What is a prepaid card?
A prepaid card, also called a pay-as-you-go card, is a product that only lets you spend money you’ve loaded onto it in advance. Instead of borrowing money from a bank that you must pay back later (as with a credit card), you are spending your own preloaded money. One of the conveniences of prepaid cards is that they are available almost anywhere, from grocery stores to gas stations, and you can use them anywhere their payment network (such as Visa or Mastercard) is accepted.
Here are some of the most common types prepaid cards:
- General-purpose reloadable cards
- Gift cards
- Retail cards
- Transit cards
- Health savings account cards
- Payroll cards
- Government benefit cards
How does a prepaid card work?
Using prepaid cards is very simple. You just need to load the amount of money you want to have available for purchases onto the card; then, as you use the card, keep an eye on your balance to be sure it will cover the purchases you want to make. For example, if you load a prepaid card with $100 and buy something for $20, you’ll have a balance of $80 left to spend on your prepaid card. If the balance on your prepaid card reaches $0, or if you want to make a purchase that exceeds the card’s current balance, you must add more money or (in some cases, like with a gift card) cover the difference with another form of payment.
What is a debit card?
A debit card is issued by a bank and linked to a checking or savings account. Each time you use a debit card, you are transferring money electronically from your bank account to pay for your purchase, reducing your bank account balance. You can also use a debit card to withdraw cash from your account via an ATM. A debit card may not have the protections of credit or charge cards, although some financial institutions place protections on their debit cards, and debit cards can have federal deposit insurance through the bank.
Debit cards are a big industry. Wells Fargo dominates the industry, with more than 50 other issuers competing in the market.
Here are the top 5 in purchase volume, according to Nilson’s April 2019 report:
- Wells Fargo
- Bank of America
- U.S. Bank
How does a debit card work?
Debit cards pull money out of your bank account to cover your purchases, so you’ll need to keep an eye on the balance of the account linked to your card to ensure you’re not spending more money than you have. If you overcharge, your card may be declined or, if you’re not opted into overdraft protection, your bank may charge you overdraft fees to cover the purchase. Debit cards also usually have daily spending limits, so you may not be able to make especially large purchases with a debit card.
What are the differences between a debit card and a prepaid card?
Unlike a debit card, a prepaid card is not linked to a bank account. This means that instead of drawing money out of your account with each purchase, you are drawing from a balance preloaded onto your prepaid card. With a prepaid card, even if you have thousands of dollars in your bank account, you can be limited to the amount preloaded on your card. In contrast, a debit card draws money directly from your account to pay for purchases, so you do not need to preload it with cash.
What is a credit card?
A credit card is a lending product that allows you to borrow money from a bank to cover your purchases. Unlike with debit and prepaid cards, when you use a credit card to buy something you are using the bank’s money, not your own. You then pay back the money you’ve borrowed by the due date or pay a minimum with the understanding that you’ll pay interest on the balance in exchange for carrying the debt from month to month.
There are several types of credit cards, and many let you earn rewards on your spending and build or repair your credit history:
- Travel cards
- Travel cards
- Cashback cards
- Business cards
- Balance transfer cards
- Luxury cards
- Secured cards and other credit-builder cards
How does a credit card work?
When you’re approved for a credit card, you’re given a set credit limit and can borrow up to that amount to cover your purchases (or, in some cases, balance transfers and cash advances). You’ll get a bill listing what you’ve purchased and what you owe, and you must pay back at least the specified minimum by the due date. If you don’t pay on time, you may be charged fees and damage your credit score. If you don’t pay off your full balance, you’ll be charged interest on whatever you still owe.
What is a charge card?
A charge card is very similar to a credit card, with a few key differences. As with a credit card, a charge card allows you to borrow money from an issuing bank to cover the purchases you make. The main difference is that a charge card requires you to pay your balance in full each month to avoid a penalty. Unlike credit cards, charge cards have no preset spending limit or APR. These cards tend to have excellent rewards and benefits and are primarily offered by American Express.
How does a charge card work?
You can use a charge card just like a credit card, but carrying any sort of balance is not an option. Because of this, charge cards are not usually useful as financing tools. Additionally, because charge cards have no preset credit limit, they don’t factor into your credit utilization.
Are prepaid cards safe?
Prepaid cards are not credit cards, but they still have protections. Prepaid cards in a payment network such as Mastercard or Visa might enjoy zero liability protections, as in the case of the Gloss Prepaid Visa RushCard.
The Consumer Financial Protection Bureau is rolling out a new rule in April 2019 that makes the fees and other details of your card more clear with formatting that’s similar to credit cards’ Schumer Box.
The new rule will also allow you to access your account on line, like a bank account or credit card. You’ll also have greater protection from loss, theft or incorrect charges, according to CFPB.
Is a prepaid card a bank account?
No. A prepaid card is a standalone financial product that you load with money, then it eventually runs out of money unless you reload more. A bank account’s card is called a debit card – it operates in a similar way, but it is tied to the account’s funds. Neither is a credit card, which basically provides short-term loans to the cardholder.
A prepaid card can have similar features to a bank account, however. For example, you can use it to deposit your paycheck or auto-debit bills. This is because routing and account numbers can be assigned to the card.
Neither a prepaid card nor a debit card can be used to build credit, while you can build credit with a credit card. If your credit isn’t its best, try taking out a secured credit card for credit-building. Just make sure the card issuer will notify the 3 major credit bureaus of your credit habits.
Who should use a prepaid card?
Prepaid cards are increasingly popular, with the number of U.S. adults who used these products at least once a month increasing by 50% from 2012 to 2014, according to a 2015 Pew Trusts study.
But who should use a prepaid card? You might embrace them because you can’t land a checking account. Or perhaps you appreciate the convenience. One thing we know – consumers typically choose prepaid cards to control spending, control fees or make purchases.
“A prepaid card may be a particularly good choice for a high schooler or college student,” says CreditCards.com Industry Analyst Ted Rossman. “A parent could load money onto one of these cards to provide their child with spending money and ease him/her into the process of paying with plastic before transitioning to a ‘real’ credit card. Prepaid cards are also useful for people who are afraid of debt. Be wary of fees, though, and note that you won’t build a credit history or earn too many rewards with a prepaid card.”
Prepaid vs. credit card
Figuring out whether your card is prepaid or credit can be confusing because both can have network symbols on the front of the card, such as American Express, Visa or Mastercard. But they are very different.
A credit card is a lending product. With a credit card, you charge a purchase, then you can pay it back in full by the due date and avoid paying interest charges. Alternatively, you can carry the balance to the next month and pay interest. The going APR for credit cards vary depending on the type of card, but the average is 16.65%.
A prepaid card uses your money to pay for purchases. You load the card with the amount you want, then use the card as you would use a credit card, presenting the card at the register. The difference is you don’t pay interest fees because you are using your own money – you aren’t borrowing. However, prepaid cards can have fees for signature purchase transaction fees, PIN purchase transaction fees and foreign transaction surcharges. That said, prepaid cards can have features such as the ability to get text messages or email alerts with the Blue Netspend Visa Prepaid Card.
Advantages to credit cards are that you can use them to build credit, and you can use them to borrow money. Prepaid cards are helpful when you have had difficulty with credit or you don’t want a checking or savings account.
Pros and cons of prepaid cards
While prepaid cards are great for keeping track of your money and avoiding bank accounts or interest charges, they don’t help with building credit and they can have sizeable fees. Here are the pluses and minuses of prepaid cards:
Pros of prepaid cards
- You don’t need a banking account. Unlike a debit card, which is tied to a checking or savings account, your prepaid card stands alone with its own cash.
- Can be used for all manner of spending. If an open-loop card, which means it’s linked to a network such as Visa or Mastercard, then the card can be used at retailers that accept that network.
- Direct-deposit your paycheck. If the card has its own account number and routing number, you can direct deposit and auto debit through your prepaid card without a bank account.
||Direct deposit features
|Walmart MoneyCard Mastercard
||Access money up to 2 days early with direct deposit
|Netspend Prepaid Mastercard
||With direct deposit, you can get paid faster than a paper check
|Control Prepaid Mastercard
||Get your tax refund direct deposited and no waiting in line to cash your check
- Manage your money. “Most prepaid cards won’t allow you to spend more than the balance of the card,” says Mike Clark, co-owner of B&C Media LLC. “If you attempt to, the transaction will just be denied. So, prepaid cards impose a type of financial discipline – to spend only what you have. Credit cards, on the other hand, allow you to spend more than what you have. For some, the temptation is too great. That’s why 65% of credit card users carry a credit card balance. Those users not only spend beyond their means but also finance their over-spending with high-interest debt.”
- It’s protected. If it is linked to a network, you’ll enjoy zero liability protections. And if you report the loss or theft of a registered card to the issuer, most will restore your original balance and issue a new card.
- No interest. Unlike a credit card, you won’t be charged an interest fee because you are using your own money.
- No credit check. A bank is not checking your credit, which can slightly impact your score.
- Can’t overdraw. There are no overdraft fees.
- Personal information is safe. Your personal information isn’t tied to a prepaid card.
Cons of prepaid cards
- Fees. Some prepaid cards charge fees. “Fees typically include a monthly fee, cash load fees, and sometimes ATM fees,” says Clark. “For a credit card user that always pays her full monthly balance, a prepaid card will always be the more expensive choice. The same is true of checking account debit cards if the consumer qualifies for a free checking account and doesn’t overdraw his or her account.”
- Can’t build credit. Unlike secured credit cards or other credit-building cards, prepaid cards don’t help you build credit, says Jeff White, senior financial analyst for FitSmallBusiness.com. However, “you can build credit through a credit card, and if you pay it off each month, then you’re not being charged any interest.”
- Can run out of money. If you don’t pay attention to how much money you have on your card, you can wind up unable to pay at the counter.
- Fewer protections. “Prepaid cards do not offer as many legal protections to consumers as traditional debit or credit cards,” says Monica Eaton-Cardone, co-founder and COO of Chargebacks911. “For example, let’s assume the cardholder needs to dispute a fraudulent or mistaken charge on her prepaid card. While many card issuers will still allow customers to dispute charges, the consumer doesn’t have a guaranteed legal right like she would with a conventional credit or debit card. Thus, the consumer takes on a greater share of fraud liability when using a prepaid card.”
What to look out for with prepaid cards
With all the advantages of prepaid cards, there are a few things to watch out for, including how it works and its features. For example, they actually have some protections and they can be used widely, yet they don’t work like a credit card. Here are 7 things to pay attention to:
- It’s not a credit card. A prepaid card is more like a debit card – once you’ve spent the money on the card, you’re done, unless you reload the card with more funds. With a credit card, you are borrowing money that you will pay back later.
- It’s not tied to a bank account. Unlike a debit card, a prepaid card isn’t tied to a checking or savings account. However, it can have routing and account numbers that you can use to auto-debit or deposit funds.
- A prepaid card has protections. Although it’s not a credit card, as part of a payment network, it has some protections similar to a credit card.
- You can buy it at a variety of places. From grocery stores to minute markets, there are a variety of locations where you can buy a prepaid card. Simply load it with the amount of cash you want, and you’re ready to go!
- It can be used for budgeting. You can load it for a specific type or purchase, such as groceries. Then, when your card runs out of money, you simply stop spending on that item.
- Watch out for fees. There are sometimes surprise fees in a prepaid card, so beware.
- You can’t build credit with a prepaid card. For that, you’ll need a credit card. Start with a secured credit card or an unsecured card for someone with bad or no credit.
Laura is an editor and writer at CreditCards.com. She has written extensively on all things credit cards and works to bring you the most up-to-date analysis and advice. Laura’s work has been cited in such publications as the New York Times and Associated Press. You can reach her by e-mail at firstname.lastname@example.org and on Twitter @creditcards_lm.
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