How Do Prepaid Debit Cards Work?
A prepaid debit card isn’t connected to your bank account. Instead, you buy the card from an authorized retailer, activate it, and then load money onto it.
Cash is king, but not everyone wants to carry a wallet full of cash wherever they go. You could always use a debit card or a credit card, but what if you don’t want to share your personal information with another financial institution?
A prepaid debit card may be the way to go. Learn more about how prepaid debit cards work and how they’re different from standard debit and credit cards.
What Is a Prepaid Debit Card?
A prepaid debit card, also known as a stored-value card, is a payment card that looks like a traditional debit card. The main difference between the two is that a prepaid debit card has money loaded onto it, while a debit card draws from the money you have in your bank account.
How Do Prepaid Debit Cards Work vs. Traditional Debit Cards?
When you use a traditional debit card, you’re spending money from your checking or savings account. If you don’t have enough funds to cover the transaction, your bank may allow the transaction, leaving you with a negative account balance. You may even have to pay an insufficient funds fee for the privilege of using your debit card to spend more money than you have in your account.
A prepaid debit card isn’t connected to your bank account. Instead, you buy the card from an authorized retailer, activate it, and then load money onto it. Some companies allow you to load money at the store, while others require you to use direct deposit, add funds online, or call a toll-free number.
Advantages of Using Prepaid Debit Cards
Prepaid debit cards have several advantages. One of the best reasons to use one is that you can’t overspend. If you load $100, you can only spend $100, so there’s no risk of overdrafting your bank account.
Carrying a prepaid debit card also makes it easy to pay for purchases. You can use a prepaid debit card just like a traditional debit card, eliminating the need to carry cash or buy merchandise with a credit card.
Some people avoid banks because they don’t want other people to see how much money they have. Others don’t qualify for bank accounts due to past financial challenges. For example, someone with a history of overdrafting accounts may not be eligible for a checking account with some institutions. Prepaid debit cards give the “unbanked” a way to participate in the economy without having a bank account.
Potential Challenges of Using a Prepaid Debit Card
Although prepaid debit cards have several benefits, you also need to be aware of some potential challenges. If you lose your card, you need to report it lost or stolen right away. Otherwise, the person who finds it may spend your entire balance before you even realize the card is missing.
Another disadvantage of using prepaid debit cards is that you don’t receive monthly statements. Some companies allow you to track your balance online, while others send text messages with your balance details. This makes it a little more difficult to track your spending.
Finally, you need to watch out for fees and service charges. Depending on which card you choose, fees and service charges may eat up a large portion of your balance. For example, some cards charge an activation fee, a monthly service fee, an inactivity fee, and a fee for every purchase you make.
If the activation fee is $3.95, the monthly service fee is $5, and you get charged $1 every time you make a purchase, you can easily use up a $50 card in one or two months. The more purchases you make, the faster your balance decreases.
Prepaid Debit Cards vs. Credit Cards
Although prepaid debit cards are similar to credit cards, there are a few key differences. For example, a prepaid debit card lets you spend money you already have. If you load $200 onto a prepaid debit card, you can spend $200.
In contrast, a credit card allows you to spend against a line of credit offered by a bank or another financial institution. When you make a purchase, you’re not spending your money—you’re spending the bank’s money. If you have a credit card, you have to make minimum monthly payments to keep your account in good standing.
Additionally, if you don’t make your credit card payment on time, the issuer may charge you a late fee. If the payment is late enough, they may even report you to the credit bureaus, causing your credit scores to decrease. If you have poor credit due to past late payments, start working to repair your credit to get your finances in order.