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Strict about your budget? Prepaid and debit cards can help you control your spending by setting your balance up front. Note that prepaid and debit cards are not the same as credit cards. If you’re looking for a credit card but are concerned about a low credit score, check out these card offers from our partners.
Strict about your budget? Prepaid and debit cards can help you control your spending by setting your balance up front. Note that prepaid and debit cards are not the same as credit cards. If you’re looking for a credit card but are concerned about a low credit score, check out these card offers from our partners.
December 28, 2020
Editorial disclosure: All reviews are prepared by CreditCards.com staff. Opinions expressed therein are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including card rates and fees, presented in the review is accurate as of the date of the review. Check the data at the top of this page and the bank's website for the most current information.
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.
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.
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.
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 of prepaid cards:
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. If the balance reaches $0, or if you want to make a purchase that exceeds the card’s current balance, you must add more money or cover the difference with another form of payment, as in the case sometimes with a gift 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. Debit cards are a big industry. Wells Fargo dominates the industry, with more than 50 other issuers competing in the market, according to the Nilson report.
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.
If you overcharge, your card may be declined or 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.
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:
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.
No, there’s no way to build credit with prepaid cards. Credit is established through positive borrowing history. Since you provide the money upfront when you purchase a prepaid card, you’re not borrowing or repaying any money.
While prepaid cards may make sense for some situations, it’s important to build credit. Good credit can be a bridge to the things you want. Having no credit or bad credit can be a roadblock in achieving your goals, such as buying a house, getting that next great job or lowering your insurance premiums. If you want to dip your toe into credit building, explore secured credit cards, which usually provide a low credit limit in exchange for a security deposit.
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 enacted a rule in April 2019 that makes the fees and other details of your card more clear with formatting that’s similar to the credit card Schumer Box.
The new rule also allows you to access your account online, like a bank account or credit card. It also provides greater protection from loss, theft or incorrect charges, according to CFPB.
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.
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 – according to the FDIC, 8.4 million households in the United States did not have a bank account as of 2017. 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.”
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.
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:
Card | 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 |
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:
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