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What Is a Prepaid Debit Card?

You’ve probably received a Visa, MasterCard or American Express gift card at some point. Or, you’ve bought one yourself. Prepaid cards can be found in the checkout line at the gas station or even in your mail as a reward for participating in a phone survey. They’re everywhere. But do you know what exactly a prepaid debit card is and how they differ from credit cards?

A prepaid debit card is like a gift card for cash. When you buy one or receive one, it is preloaded with a set amount of cash. As you use it, you draw from the funds loaded onto the card, and you can use the card until the funds are depleted.

How Do Prepaid Debit Cards Work?

To use a prepaid debit card, the first thing you need to do is fund the account. Typically. this is done when you purchase the card. For example, if you purchase a $100 prepaid Visa card from a store, the account associated with the card will have $100 in it. As you make purchases with the card, you draw from these funds.

Let’s say you have that $100 prepaid card. You use it to buy movie tickets and spend $25. Then you buy dinner for $50. You’ve used $75, and have $25 left on the card. If you try and purchase something else for, say $30, you can use the card for $25 and will need a different form of payment for the last $5, because the funds will have run out.

Prepaid debit cards are usually refillable. If you like using this method of payment, it’s easy to add more money. Just log onto the card’s website, set up an account and add money to the card using another payment method, like a credit or debit card. If you prefer to use cash, you can buy a new prepaid debit card.

Watch out, because many prepaid cards charge fees for ATM withdrawals, reloading and even PIN transactions. Be sure you are aware of all of your card’s fees before you use it, or you may end up losing a lot of your funds to them!

Where Can You Get Prepaid Debit Cards?

Retail stores, like Target, Walmart and Walgreens, often sell prepaid debit cards in the same section as gift cards. This makes it easy to pick up a prepaid card as a gift or for yourself when you’re out doing your other shopping. The card will be activated at the cash register and you’ll have to fund the card then, alongside the rest of your purchases.

You can also get prepaid debit cards from any bank and pay for them right at the branch, or purchase a card from any card network’s website. These options allow you to add any amount of money onto the card, as opposed to cards available at retail, which typically require set amounts (e.g. $50 or $100).

Where Can You Use Prepaid Debit Cards?

What Is a Prepaid Debit Card?

Prepaid debit cards are sponsored by card networks and can be used anywhere that card network is accepted. That means, if you have a Visa prepaid gift card, you can use the card anywhere that accepts Visa cards. You can use prepaid cards in stores or online for any purchase where you could otherwise use a credit card.

Some prepaid cards also allow access to national ATM networks, like Allpoint, or a bank ATM if the card is issued by a bank, such as Citibank. This can be useful if you need to make a cash purchase and want to withdraw money without paying fees.

The Difference Between Prepaid Debit Cards and Credit Cards

Even though prepaid debit cards have card network logos, like Visa or MasterCard, on them, they are not credit cards. Credit cards operate based on borrowing money and repaying it. Prepaid debit cards are, like the name states, prepaid and draw from a funded account. Since you are using set funds rather than borrowing against credit, you don’t have to worry about late fees, interest or debt.

Prepaid debit cards do not affect your credit in any way, since they are funded and then use as payment. If you are looking to build credit or increase your credit score, a prepaid debit card is not the way to go. Instead, look into a credit card with a low APR and work to pay off your bills every month, on time.

Who Should Use a Prepaid Debit Card?

What Is a Prepaid Debit Card?

Prepaid debit cards are a great option for individuals with bad credit who can’t get a credit card or anyone who can’t get a debit card for their bank account. Even though they won’t help you to rebuild your credit, you will still be able to pay with plastic – a necessity for internet or over-the-phone purchases.

These cards are also a great option for children and teens who are learning about money and spending. Parents can load their children’s allowance, birthday money or other funds onto the card. It can also be good for college students, since parents can load money onto the card online, should their kids need money in an emergency.

Prepaid cards can also work well for budgeting. Divide your budgeted money onto different prepaid cards for each category of your budget. This way, you are sure not to overspend in any one area, since the card will only have your allotted funds on it.

Tips for Responsible Credit Card Use

  • Let’s say you’re building up your credit score after it took a hit from some unpaid bills. Prepaid debit cards won’t help increase your score, but a secured credit card might. This type of card is backed by your bank account, meaning you have a limited amount of purchasing power. Responsible usage (paying the balance each billing cycle) will help your credit score increase.
  • You can always treat your credit cards (and prepaid debit cards!) as a version of the envelope cash budget. Instead of an envelope dedicated to each spending category (food, entertainment, gas, etc) with a set amount of cash, you can use a reward credit card for all your grocery purchases and gas (i.e. necessities) and use a prepaid debit card for categories where you’re prone to overspend, like dining out or shopping.

Photo credit: © iStock/millionsjoker, © iStock/PeterPhoto, © iStock/PeterPhoto

Danielle Klimashousky Danielle Klimashousky is a freelance writer who covers a variety of personal finance topics for SmartAsset. She is an expert on topics including credit cards and home buying. Danielle has a BA in English from Wesleyan University.
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