Prepaid Debit Card vs. Credit Card – What’s the Better Choice?

Wondering whether a prepaid debit card vs. credit card is best for you? We look at six factors to see how each stacks up.

Prepaid Debit Card vs. Credit Card
When it comes to swiping your card in the store, prepaid debit cards and credit cards look pretty similar. But there are some real differences – including how easy they are to acquire, how much they cost, and the impact on credit.

We put prepaid debit cards and credit cards head-to-head in crucial areas to see how each stacks up.

Access: Getting a Prepaid Card vs. Getting a Credit Card

With no credit or ChexSystems checks, virtually anyone can get and use a prepaid debit card. The only requirement is verification of identity–which requires a social security number. You can get most prepaid debit cards online, many without activation fees.

Credit cards aren’t so easy to get. Credit cards are, after all, revolving loans, so credit card issuers want to make sure the cardholder will pay it back. That’s why you need a good, if not excellent, credit score to get one. A score of 680 – 700 is somewhere near the minimum. Many cards require a score of 780 or higher.

Bottom line: For ease of access, this goes to prepaid cards.

Access: Winner — Prepaid Debit Cards

Cost: Prepaid Card Fees vs. Credit Card Interest

Prepaid cards charge fees. Credit cards charge interest.

For prepaid cards, there can be one-time fees, such as an activation fee, but the primary costs are from ongoing fees. Those typically are either monthly fees or transaction fees. Monthly fees are charged just for having the account. Transaction fees are charged for every purchase. There are also fees to add cash to a prepaid card and sometimes ATM fees to get cash from the card.

In the best-case scenario, you can get a prepaid card with no monthly fee or a monthly fee that you can waive, that has free access to cash, and one or more ways to load the card for free. But with most cards, you will pay some fees for using the card.

Of the 80 prepaid cards that we track, the average monthly fee, for those charging a monthly fee versus a transaction fee, is $5.47. The average ATM fee is $1.07, and a cash reload will typically cost $3.95. So, assuming two monthly trips to the ATM and one cash reload, the monthly cost of a prepaid card is $11.56 or $138.72 per year.

For credit cards, the primary cost is from interest. While some credit cards charge an annual fee, its the minority. Only 20% of credit cards charge annual fees in addition to interest charges, although that number increases to 30% or less for those with lower credit scores.

In the best-case scenario, you can get a no-annual-fee credit card and pay the entire balance each month. In that case, your cost is $0.

The reality though is that 65% of credit card users that don’t pay their balance in full each month. And those users carrying an average balance is $4800. If you are one of those, you’re going to rack up expensive interest charges. According to the federal reserve, credit card rates averaged 13.63% in the first quarter of 2018. That means a household carrying the average credit card balance pays over $650 in interest annually.

Bottom Line: Credit cards can be free to use if you have the discipline to consistently pay off your balance. Prepaid cards can be free to use, but only if you select the right card and use it in a way to avoid monthly and ATM fees. If you follow the path of most Americans with credit cards, however, credit cards will cost you more.

Cost: Winner — Prepaid Debit Cards

Prepaid Card Budgeting vs. Credit Card Budgeting

A comparison of budgeting requires a look at how prepaid cards and credit cards work as well as the tools offered for budgeting.

Living Within Your Means

A crucial part of budgeting is living within your means. With a prepaid debit card, you can only spend the money you have. Credit cards, with limits often significantly higher than what you could afford to pay-off at month’s end, doesn’t enforce that discipline.

Budgeting Tools

Both prepaid cards and credit cards provide detailed transaction histories. So, to some extent, both can be used to track expenses to ensure they stay within your budget targets.

Some prepaid cards, like the Netspend Visa Prepaid Card, take it a step further, providing online and mobile app tools to set spending limits by category. And they notify you when you’re close to the line.

Other cards, like the FamZoo Prepaid Card or the Akimbo card, provide “subaccounts” to set digital spending categories on the card. With the Akimbo card, you can even get separate cards for your primary budget categories.

Many credit cards have spending alerts to notify you when your total spending on the card hits a threshold that you set. A few cards even allow you to set a budget amount for a spending category and receive alerts when your spending exceeds the amount. However, it still requires you to be aware of your credit balance versus the cash you have available to pay it off.

Savings Targets

There’s one line item that your budget should always have–you. And savings is how you pay yourself, providing for a financial need that you’ll have down the road.

Several prepaid cards offer high-interest savings accounts with the prepaid card account that you can use to meet your savings goals. Some others, like the Walmart MoneyCard, while not providing an interest-bearing account, provide a savings “vault” to separate money set aside for savings from money used for spending.

Credit cards? Well, they’re about borrowing. No savings features there.

Bottom line: Both credit cards and prepaid cards can help with budgeting because they both can serve as a detailed tracking mechanism for your spending. Only a select number of prepaid cards and credit cards provide more robust budgeting tools that can provide further assistance with capping spending by category. Of the two, only prepaid cards provide a mechanism for adding savings to the mix. This one’s close, but goes to prepaid cards.

Budgeting: Winner — Prepaid Debit Cards

No Credit Impact vs. Credit Impact

Prepaid cards don’t impact your credit score. Credit cards do.

A prepaid card is just a system to spend your own money. It’s not a loan. So it has no impact on credit score.

A credit card, on the other hand, will impact your credit score. That can be good or bad.

First, any credit card application will involve a credit inquiry. That will have a negative impact on your credit score, albeit a small one. How you use the card determines the impact from there.

Timely payments, use of a reasonable percentage of the available credit line, and maintaining the account for a long time will all increase your score.

The thing about reporting, however, is that it goes both ways. Miss a payment or two and you can severely damage your credit score. Payment history is the most significant part of your credit score. And late payments take seven years to fall off your report, even if you ultimately pay the bill.

Bottom line: If you’re looking to build your credit score, a credit card is the way to go. Your on-time payments get reported to the credit agencies, building your positive reputation as a borrower. A good credit history makes it easier (and cheaper) for you to secure loans in the future.

Credit: Winner — Credit Cards

Prepaid Debit Card Rewards vs. Credit Card Rewards

Most prepaid debit cards don’t offer rewards. Of the prepaid cards that do offer rewards, they’re limited.

One of the few prepaid cards that offer rewards on all purchases is the American Express Serve Cash Back card, which offers 1% cash back. But the monthly fee is $5.95. So, you would need to spend $595 a month to break even. Compare that to American Express’s Cash Magnet credit card, which has 1.5% cash back and no monthly fee. Spend $595 on that credit card, and you would earn $8.93.

Many credit cards offer cash back or travel rewards, with some cards offering special perks like airline lounge access and travel insurance. Active credit card “hackers” can earn free travel from their regular spending by making the most of credit card rewards and new sign-up bonuses.

Credit card rewards can be very valuable but only if you are paying off your bill in full each month. If you don’t, interest costs quickly outstrip any rewards value.

Bottom line: Prepaid card rewards are rare and minimal. Credit cards rewards offer far more value.

Rewards: Winner — Credit Cards

Acceptance for Purchases

Both credit cards and prepaid cards are issued through the major payment processors–Visa, Mastercard, and American Express. And both are accepted anywhere cards are accepted. This includes retail stores, online shopping, and hotels.

Both can also be used for most automatic and recurring payments, like a Netflix subscription or even your electric bill.

Bottom line: Wherever you want to shop, if they accept credit cards, they almost certainly accept prepaid debit cards as well.

Acceptance: Tie

Should You Use a Prepaid Debit Card or Credit Card?

Prepaid debit cards and credit cards both have their benefits and negatives. It comes down to is your personal needs and preference.

If you’re a responsible money manager that can avoid interest costs, a credit card will let you earn some rewards for your spending while building your credit score for future needs.

However, if you’re concerned about overspending, a prepaid debit card can help you get control of your finances without risking damage to your credit score or racking up overage charges.