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A prepaid debit card is a reloadable payment card that can be used to shop online or at a store, transfer money, pay bills and withdraw cash from ATMs. These cards are surprisingly popular -- about one in 10 U.S. households use them -- and versatile, being usable anywhere Visa, MasterCard or American Express are accepted. You can buy them at banks, online from credit card companies, or at certain retail locations such as Walmart and Walgreens. They are funded in advance by cash, check, direct deposits or transfers from another account.
Unlike regular debit cards, they don’t require a bank account or minimum balance. That makes these cards a good option for people who have a difficult time maintaining a traditional checking account or those who prefer an alternative to a bank. People often prefer prepaid cards over traditional checking accounts because of high and unpredictable bank fees, minimum balance requirements and distrust of banks.
Also, parents may consider a prepaid card for their teenage or college-age children to teach them budgeting and money management without worrying about overcharging a credit card or incurring overdraft fees or minimum balance fees charged by many checking accounts. If a child is under 18, parents can open the prepaid card account themselves and get a secondary card—often with spending limits—for the child. Children over 18 can open a prepaid card account themselves, and parents can set up automatic transfers to the card from their bank account.
Prepaid Cards Compared With Other Payment Cards
For all their pluses, though, prepaid cards resemble other alternatives that are better options for certain consumers. Here’s a head-to-head comparison against some other kinds of card.
Prepaid Cards vs. Debit Cards: Despite the name, prepaid debit cards differ in significant ways from regular debit cards. Debit cards must be linked to a checking account, and funds from that account pay for purchases or ATM withdrawals. You can also overdraft on debit cards, which triggers a fee, if you spend more than your checking account balance. Right now, debit cards come with more federal protections from liability and fraud, but that’s set to change in April 2018, when prepaid cards will get new protections (see below). But prepaid cards and debit cards are similar, too. Both cap daily ATM withdrawals and impose a daily purchase limit.
Prepaid Cards vs. Credit Cards: There also are plenty of big differences between credit cards and prepaid cards. You must have a high-enough credit score to qualify for a credit card. With prepaid cards, there are no credit checks. Credit cards also help to build credit history, while prepaid cards don’t. When using a credit card, you borrow to pay for transactions and must pay the money back to the card issuer, either in full or smaller payments over time. Prepaid cards are pre-funded and transactions are paid with money existing in the account. Credit cards are riskier because you’re borrowing money, but many come with perks and rewards. They are also strictly regulated by the Credit CARD Act of 2009.
Prepaid Cards vs. Gift Cards: Prepaid debit cards also differ from gift cards that have the Visa, MasterCard or American Express logo. These gift cards have a pre-set amount of money and can’t be reloaded with funds. Unlike prepaid cards, gift cards can’t be used at ATMs or used to pay recurring bills or monthly subscriptions. These cards are meant as gifts for persons of any age who can spend the money on the card at any store. They can be purchased at retailers like drug stores, discount big box stores or supermarkets. These prepaid gift cards are also subject to protections and rules laid out by the Credit CARD Act of 2009.
This content originally appeared on ValuePenguin
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
