How Do Prepaid Debit Cards Work?

Prepaid debit cards can be a good alternative to a bank account and can help with budgeting. But there are some downsides. Here are the nuts and bolts of prepaid cards–from how to get one, how to add money, and what to watch for so you can make an informed choice.

How Prepaid Debit Cards Work

Considering whether a prepaid card is for you? Here’s what you need to know.

What Are Reloadable Prepaid Cards?

Prepaid debit cards are a cross between a credit card, a gift card, and a checking account debit card. They look and feel just like a credit card. In fact, some refer to them as “prepaid credit cards.” Like credit cards, prepaid cards are issued through one of the major credit card processors, like Mastercard, Visa, or American Express. So you can use them at any retailer or online store that accepts that network.

Unlike credit cards, prepaid cards don’t let you buy now and pay later. Before you can spend money, you first have to “load” it onto the card–just like you do when you buy a gift card. But unlike gift cards, reloadable prepaid cards allow you to load more money on the card at any time.

Unlike gift cards, reloadable prepaid cards allow you to load more money on the card at any time, and they allow you to get cash using ATMs, like a checking account debit card. But there’s no bank account with a prepaid card. Money is deposited directly to the card.

Who Can Get a Prepaid Card?

Since you’re only able to spend your own money, nearly anyone at least 18 years old can get a prepaid debit card. Because they don’t involve credit, prepaid cards don’t require a credit check. Similarly, because there’s no bank account, prepaid cards don’t require a ChexSystems check.

How Do You Get a Prepaid Card?

Prepaid cards are easy to get. All of them are available online with short applications. They all require the same basic information–name, address, date of birth and Social Security number–to verify identity, as required by the USA Patriot Act.

They’re also available in major retailers, like Walmart, Target, and Walgreens, and in many grocery chains and discount stores. Prepaid cards sold in stores are actually temporary versions of the card. You can load money on the card at the time of purchase and use it for purchases, but not much else until you get your permanent, personalized card in the mail.

Some cards charge an upfront fee–referred to as an “activation fee” or “purchase fee”–when you get the card. There are, however, a number of prepaid cards with no activation fee.

Why Use Prepaid Cards?

Prepaid debit cards are the fastest growing form of non-cash payment. People are embracing prepaid debit cards for a wide variety of reasons.

No Credit Needed

For those with poor credit, prepaid debit cards offer an alternative to credit cards as a way to make online purchases or bill payments, book hotel rooms or rental cars, and to avoid carrying cash. Unlike credit cards, prepaid cards don’t require good credit or any credit.

Easy Way to Control Spending

For those who are budgeting, prepaid debit cards can help because they don’t allow you to spend money you don’t have. For most cards, attempted charges above your balance will just be declined. A few prepaid cards offer a small “purchase cushion” feature that will allow the card balance to go negative. Even for those cards, the purchase cushion is limited to $10.

Bank Account Benefits Without the Bank

These days, prepaid cards can have many of the features that checking accounts have. Nearly all prepaid cards offer direct deposit, ATM access, and the ability to pay bills online. Most offer mobile apps for iPhone and Android devices to check account balances and deposit checks.

Can Form Positive Habits

If someone is interested in getting a credit card but is worried about overspending, a prepaid debit card can be a good introduction to using plastic without borrowing. By only allowing you to spend the money you have, you get in the habit of tracking your funds and using a card responsibly.

Prepaid debit cards can even be an introduction to money management for teens. Some cards are available to users 13 and over, as a subaccount to their parents’ card.

Offers Security

Beyond the obvious benefit of not having to carry cash, people use prepaid debit cards for other security reasons. When traveling to locations where credit card fraud is common, or if you often shop online, a prepaid card sets a limit on potential losses. An identity thief can only access the amount you put on a card.

A More Flexible Gift than Store Gift Cards

Prepaid debit cards can be used at all major retailers. They also offer some bank services and have options to easily track your balance and transaction history.

How to Add Money to a Prepaid Card

There are a number of ways to add money to a prepaid card.

Direct Deposit

Nearly all prepaid cards offer direct deposit of paychecks or government benefits for free.

Bank Transfers

Nearly all prepaid cards allow free transfers from bank accounts to prepaid cards.

PayPal

If you have a PayPal account, you can use it to fund many prepaid cards–like the Walmart MoneyCard, Green Dot, and, of course, the PayPal Prepaid Card. It works like transferring money from a bank account.

Loading Cash

Loading cash is where there’s the biggest difference among cards.

Most prepaid cards can be reloaded with cash using a third-party cash reload service, like Green Dot’s MoneyPak. The Green Dot MoneyPak involves purchasing a MoneyPak at a retailer and giving the cashier the money that you want to load on your card. The MoneyPak has a unique number and requires the additional step of going to the Green Dot’s MoneyPak site to enter the number and your prepaid card account number. After completing the process, the cash is available on the card in minutes.

Other reload services, like Green Dot’s Reload @ the Register, skip the interim step of entering an identifying number online. With Reload @ the Register, you just take the cash and your prepaid card to the register.

There’s a fee for both types of cash reload services–from $3 to $5.95–and vary by the retailer providing the service.

Other similar prepaid card reload services include WU Reload+ (Western Union), Vanilla Reload, and Walmart Rapid Reload. The services, as well as those offered by Green Dot, are offered at grocery stores, convenience stores, and other retail locations.

Some bank issued cards, like Chase Liquid or Fifth Third’s Access 360 card, typically allow you to load cash for free at their bank branches by taking the card and the cash to the teller.

Checks

The easiest and least expensive way to load checks on prepaid cards is to deposit them using the prepaid card’s mobile app. Many prepaid cards, like Netspend or RushCard, offer check deposits through their mobile apps without charge. There may be a wait, however, of up to 10 days for the funds to be available. Funds can be made available faster–sometimes in minutes–for a fee.

Features of Prepaid Cards

Prepaid cards can offer features for paying bills, budgeting, savings, mobile access, and others. They differ widely by card. Here’s a list of features to look for.

ATM Access

Every prepaid card offers ATM access, just like traditional debit cards. However, some cards charge a fee; others offer a network where you can withdraw cash or check your card balance for free. For those cards that charge an ATM fee, you can also expect an additional fee charged by the ATM operator.

Direct Deposit

Every prepaid debit card is set up with its own routing and account number to use for direct deposit for paychecks or government funds.

Bill Pay

All prepaid cards can be used to pay bills through a vendor’s website, if the vendor accepts credit or debit cards. However, some prepaid cards, like the Green Dot Visa and Walmart MoneyCard, have their own bill pay services. They’re similar to most bank checking accounts.

With these services, you can pay any vendor through your card’s website. That allows you to pay your bills from a central location and even set up automatic or recurring payments. Some prepaid cards will send paper checks to vendors not set up for electronic payment.

Budgeting

Some prepaid cards offer features to help with budgeting. For example, the Akimbo card offers “subaccounts” allowing you to use those subaccounts (and even a separate card for the account) for any budgeting category that you choose–like groceries or entertainment. It’s a way to put your money into spending categories and stick to it.

Other cards, like the Walmart MoneyCard, allows you to put money away for a specific goal–like saving for a vacation fund. You decide what goes in the “vault” and it’s not accessible for everyday spending unless you transfer it back to the card balance.

Savings Accounts

The same budgeting features can be used for savings. But only a handful of cards offer a separate interest-bearing savings account. Those savings accounts come with some hefty introductory yields–as much as 5% or more.

Mobile Apps

Many, but not all prepaid cards, have mobile apps. Undoubtedly, this can be one of the most important features, because the apps typically allow you to handle a number of tasks–like checking your balance or depositing checks–and avoid ATM or check cashing fees.

Rewards

Some prepaid cards offer cash back, refer-a-friend, direct deposit, or other rewards. They’re generally fairly modest. Cash back rewards through Walmart’s prepaid card are limited to $75 per year; Green Dot’s rewards are capped at $100 per year. Still, cash back rewards can more than offset the fees charged by the card in some cases.

Purchase Cushion

This feature allows a purchase to be approved, even if you’re a little over your balance. It’s a little like “overdraft protection” on checking accounts. It’s generally limited to $10 and comes without the steep fees of a bounced check.

Text/Email Alerts

Some cards provide customizable text and/or email alerts for purchases, transaction declines, and deposit confirmations.

Prepaid Card Limits

Prepaid debit cards have limits, like the maximum balance you can have on the card at any time. The amount of each limit varies among cards. Here’s the list:

  • Card Balance Limit – the maximum balance you can have on the card
  • ATM Limit – the maximum amount that you can withdraw from an ATM, usually per day
  • Cash Load Limit – the maximum amount of cash (excluding direct deposit and bank transfers) that you can add to the card, usually per day
  • Spending Limit – the maximum amount that you can purchase, usually per day

The Downside of Prepaid Cards

While prepaid debit cards do have benefits for those who are budgeting, have poor credit, or want to avoid banks, these cards do have their drawbacks.

Fees (and More Fees)

All prepaid cards charge fees. Generally, the primary costs of using a prepaid card are made up of either monthly fees or purchase fees and, in some cases, ATM fees. Typically, prepaid cards that charge monthly fees don’t charge purchase fees. Likewise, cards that have purchase fees generally don’t charge monthly fees.

A monthly fee is a fee just for having the card, regardless of how you use it. A purchase fee is a fee charged for each purchase. So, if you plan to use your prepaid card for everyday purchases, avoid the cards with purchase fees. They’ll add up fast.

Prepaid cards may charge a number of other fees that are likely to be encountered less often–inactivation fees, declined transaction fees, and card replacement fees, to name a few. Some cards even charge for check deposit or charge steep fees for faster check processing.

The good news is the most prepaid card fees can be avoided by choosing the right card and knowing how to avoid them.

There are even some prepaid cards that you can use without any fees. These cards charge monthly fees, but waive the fee if you meet certain conditions, like a total direct deposit or load amount.

Doesn’t Build Credit

Unlike a secured credit card, a prepaid debit card is not reported to the major credit agencies. This means you are not building credit history when you use one of these cards. If your goal is to improve your payment history to ultimately get a credit card, a prepaid debit card won’t help you.

No Consumer Protection Required (Yet)

Unlike debit or credit cards, federal law doesn’t require prepaid debit cards to offer limited liability for losses resulting from theft or loss of the card. This means if your card gets stolen, you could be out of luck. Some card companies are offering these features voluntarily, but the process to dispute charges can be confusing and complicated.

The CFPB prepaid card rule is expected to extend those protections to registered prepaid cards when it goes into effect in April 2019. But the law has already been delayed once. It was supposed to go into effect April 2018.

How to Find the Right Prepaid Card

For those that don’t have or don’t want a bank account or want to control spending, prepaid cards may offer a good alternative. When considering prepaid cards, take the time to review the fees and any unique features a card offers. Think about how you plan to use the card – the number of transactions you expect to have, how you plan to load the card, and where you use it most often. This will help you estimate the cost of using the card and whether there are cheaper options available.