How do prepaid debit cards work?

How do prepaid debit cards work?

A prepaid debit card is much like a gift card: it allows you to spend whatever amount is stored on the card. Once your balance is exhausted, you can reload your card online or at an ATM, participating store, or other physical location. Prepaid debit cards are issued by banks and branded by major credit card companies including Visa, MasterCard, Discover, and American Express.

KEY TAKEAWAYS

  • Prepaid debit cards are a useful alternative to cash.
  • Prepaid debit cards are an option for people who don’t have a credit card or can’t use a regular debit card linked to a bank account.
  • There are a lot of fees associated with prepaid debit cards, so it’s important to shop around for a good price.

Learn about prepaid debit cards

Prepaid debit cards are just as good as cash, and sometimes better:

  • It’s a safe way to move money, unlike a wad of paper money. Prepaid cards also have certain consumer protections that cash doesn’t. 1
  • Prepaid debit cards can be used for online purchases.
  • It can make a more attractive gift than cash.

Anyone who wants to stick to a strict budget, or who has trouble managing their credit card, might also consider a prepaid debit card.

You can use your prepaid debit card for any transaction you might make with a credit card or regular debit card. In many cases, the recipient may not even know the card is prepaid.

Some employers pay workers a payroll card with a prepaid debit card (this can be useful if the person doesn’t have a bank account or direct deposit). Many government benefits are also available through prepaid debit cards, including Social Security.

Prepaid Debit Cards vs Regular Debit Cards

With a regular debit card, the money you can spend is tied to the amount of money you have in your checking account. So you need to have a bank account to use a regular debit card instead of a prepaid debit card. With a regular debit card, your available amount also fluctuates daily as funds move in and out of your checking account. When using a prepaid debit card, you have a fixed amount to spend, which decreases as the amount you spend decreases and only increases when you re-swipe the card.

Disadvantages of prepaid debit cards

Prepaid debit cards can come with a variety of fees that can eat into your cash balance. These may include monthly fees, transaction fees, ATM fees, exchange fees, external transaction fees, etc. You may even be charged a card to check your balance. 2 

Employees have the legal right to refuse to be paid by payroll card because these charges reduce their take-home pay. 3 

Buy a prepaid debit card

If you buy a prepaid debit card, pay special attention to its fees. Also, consider convenience. For example, if the card can be used for free at an ATM (which is the case with many of the best cards), how big of a network of ATMs can you use, and is there one near where you live or work?

If your goal is to repair your credit rating, consider a secure credit card instead of a prepaid debit card.

Alternatives to Prepaid Debit Cards

If the reason you want a prepaid debit card is that you have a bad or no credit history and can’t get a traditional credit card, you might consider a secured credit card instead. Secured credit cards are easier to qualify because they require you to write down a refundable security deposit as collateral for the lender.

The advantage of a secured credit card is that your monthly payments can be reported to the three major credit bureaus to help build your credit history. Debit cards, whether prepaid or regular, do not report transactions to credit bureaus and do not improve your credit.

By aamritri

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