Debit Cards & Prepaid Cards

Comparing Prepaid Card Offers

By: Laura Mohammad

Updated: October 17, 2019

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:

• What is a prepaid credit card and how does it work?
• Are prepaid cards safe?
• Is a prepaid card a bank account?
• Who should use a prepaid card?
• Prepaid vs. credit card
• Pros and cons of prepaid card
• What to look out for with prepaid cards

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, growing from $1 billion in 2003 for general-purpose, reloadable prepaid cards to an expected $116 billion by 2020.

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 are the 4 main kinds of cards you think of when you think about financial cards:

• Prepaid card. A prepaid card is a product that you put cash on, then spend until you are at $0. That means you are spending your own money rather than borrowing. One of the conveniences of prepaid cards is that they are available almost anywhere, from grocery stores to gas stations. Here are among some of the most common types prepaid cards:
• 
  
  • General-purpose reloadable card
  • Gift card
  • Retail card
  • Transit card
  • Health savings account card
  • Payroll card
  • Government benefit card
• Debit card. A debit card is linked to a checking or savings account and again, you are spending money you already have. A debit card may not have the protections of the credit and charge cards, although some financial institutions place protections on their debit cards, and through the bank, it can have federal deposit insurance.

• Debit cards are 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:

  5 top debit card issuers...

  • 11.5%
  • Wells Fargo
  • 11%
  • Bank of America
  • 10.7%
  • Chase
  • 2.5%
  • PNC
  • 2.4%
  • U.S. Bank

• Nilson Report, April 2019

  A favorite type of debit or prepaid card is an open-loop card, meaning that it is affiliated with one of the networks – American Express, Visa, Mastercard or Discover. This affiliation allows you to use the debit or prepaid card at any of the retailers that accept the logo on the front of the card.

• Credit card. A credit card is a lending product, unlike the debit and prepaid cards. You use the bank's money, then pay it back by the due date or pay a minimum with the understanding that you'll pay interest on the balance for the honor of carrying the debt from month to month. There are many types of credit cards:
• 
  
  • Travel cards
  • Cashback cards
  • Business cards
  • Balance transfer cards
  • Luxury cards
  • Secured cards and other credit-builder cards
• Charge card. While not a credit card, there are similarities. The difference is that with a charge card you must pay in full each month to avoid a penalty and there is no preset spending limit, while there is a credit limit on a credit card. Charge cards tend to have excellent rewards and benefits, and are primarily offered by American Express.

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.

• 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. "All 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. "They 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:

1. 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.
2. 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.
3. 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.
4. 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!
5. 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.
6. Watch out for fees. There are sometimes surprise fees in a prepaid card, so beware.
7. 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 laura.mohammad@creditcards.com and on Twitter @creditcards_lm.