Credit Cards » Credit Card Guides » What Is A Prepaid Card And How Does It Work?
Advertiser Disclosure This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval. This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof. Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

What Is A Prepaid Card And How Does It Work?

Prepaid debit cards functions in a combination of a credit card and a checking account. In this article, we review the basics of prepaid cards
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

We earn a commission from our partner links on this page. It doesn't affect the integrity of our unbiased, independent editorial staff. Transparency is a core value for us, read our advertiser disclosure and how we make money.

Table Of Content

Prepaid debit cards functions in a combination of a credit card and a checking account. Bank holding companies issue prepaid cards.

Another thing to note is that major credit card companies such as Visa, MasterCard, and American Express brand prepaid cards.

Key Takeaways

  • Prepaid cards differ from both credit and debit cards, in the sense that there is no line of credit involved and it is not linked to your checking account. Instead, you can add money to the card at the bank it was issued, or even at the store.
  • Prepaid cards are popular with some travelers since by using these cards people can avoid carrying large amounts of cash with them, which can be very risky.
  • Prepaid cards do not have any effect on the credit score of an individual, since there is no borrowing involved.

What Is A Prepaid Card?

The concept of prepaid cards is not hard to understand. You can consider them the offspring of credit cards and debit cards.

On the contrary, they aren’t like credit cards because there’s no line of credit. They’re not like a debit cards because they aren’t linked to a checking account. Instead, you can add money to your prepaid card at your local convenience store, the bank where you got the card, or through e-funds transfer.

You can’t tell them apart from any other type because they have a MasterCard, Visa, or American Express logo, a card number, a signature stripe on the back, and company branding.

Using prepaid card for online shopping
Yes, you can use prepaid card for online shopping. (Photo by David Gyung/Shutterstock)

How Prepaid Debit Cards Work?

The features of prepaid credit cards can vary, but they have the following features in most cases.

  • Reload options: You can add money through many avenues. For example, you can set up direct deposit, load cash at retailers who accept it, and deposit checks at ATMs. In addition, some of these prepaid cards allow you to make online transfers or mobile check deposits from your smartphone.
  • ATM access: There are prepaid cards that give you the power to access accessible nationwide ATM networks. MoneyPassAllpoint, or cards that banks issue are prime examples.
  • Fees: You might have to pay a fee to activate your card. In addition, you may have to pay a fee for making a deposit when you withdraw from an ATM that’s not in its network. Issuers also can apply a monthly fee. However, they usually waive it if you make direct deposits, for instance. Moreover, some issuers charge a fee when you purchase or withdraw from an ATM.
  • Account limits: Certain cards have withdrawal limitations. Issuers can also restrict the maximum withdrawal, reload, or spending during a monthly cycle.

Sign Up for

Our Newsletter

Join our community for the latest credit card comparison tips, expert insights,
and special member-only perks.

Sign Up for

Our Newsletter

Join our community for the latest credit card comparison tips, expert insights,
and special member-only perks.

How To Use Prepaid Cards: Main Features

For those who don’t use prepaid cards, the concept of loading money on a card in order to spend can seem a bit much. Why is this extra step necessary? Here are the reasons why,

  • Money management: It’s easier to budget when you have a prepaid card. You can load the amount you need and be done with it. This prevents you from spending extra money that you don’t have to spend.  Moreover, you have the power to monitor your spending online and keep track of your transactions.
  • Security: If you frequently make purchases online, you may not want to put your debit or credit information on the web. If you put the money on a prepaid card, there will be no risk.
  • Card for the Unbanked: There are a number of Americans that don’t have a checking account. Prepaid cards empower them to make purchases without having huge amounts of cash. They also will be able to shop online as well.
  • Habit forming: There are individuals who prefer having a prepaid card before applying for a credit card. This concept teaches them responsible spending and how to pay it back if necessary. Moreover, this is a great way to teach young adults without them having full access to a debit/credit card.
  • Gift distribution: If suppressing someone with a gift card isn’t your cup of tea, you can always get them a prepaid card. That individual will be able to use anywhere they want to. This allows for more versatility on the receiver’s end because they choose what they want to spend it on.
  • Paychecks: Most businesses give individuals the option to receive their direct deposits right on their prepaid card. The best part of this is that employees can receive their money faster. It also gives the company they work for less paperwork to complete.

How Much Do Prepaid Cards Cost?

Issuers associate a range of fees for prepaid cards. 

There are usually initial charges issuers place in order for you to get a prepaid card. We recommend that you monitor our comparison chart for special deals. Some issuers will waive the initial fee if you deposit a certain amount, such as $100. Moreover, some issuers run a promotion where they will give out the cards for free.

Issuers also apply monthly fees with prepaid cards. A good thing to note is that there are plenty of cards out there that don’t have monthly fees. Most (if not all) typically charge a fee if you decide to make an ATM withdrawal. Moreover, keep in mind that there’s a huge difference between high and low fees.

Prepaid Card
Monthly fee
Cash Reload Fee
American Express Serve® Cash Back
$7.95
$3.95
Walmart MoneyCard
$5.94
$0 at Walmart, up to $5.95 at other retailers
FamZoo Prepaid Debit Card
$5.99
$4.95
Bluebird® by American Express
None
$0 at Walmart, up to $3.95 at other retailers
PayPal Prepaid Mastercard®
$4.95
Up to $3.95
Fifth Third Access 360° Reloadable Prepaid Card
$5
N/A
Netspend® Visa® Prepaid Card
Up to $9.95
N/A

Prepaid Cards vs. Debit Cards: How They Compare?

A prepaid card is not the same as having a debit card. Moreover, banks link debit cards to savings and checking accounts. You can’t link a prepaid card to a checking account. The way prepaid cards work is that you have to reload them with funds in advance.

For the most part, you cannot spend over the money you currently have on the card. For some users, overspending can occur on a checking account and with a bank debit card if they are opt-in to the overdraft protection program. Moreover, the bank can charge you a fee if they have to cover an amount they don’t have in their checking account. Their bank will require them to pay the overdraft fee as well.

Another thing to note is that prepaid cards have fewer protection features than debit and credit cards. Typically, prepaid cards do not include features that cover lost, stolen, or other unauthorized charges. To date, the CFPM made a rule requiring prepaid card issuers to cover these types of protections.

Pros and Cons of a Prepaid Credit Card

Prepaid cards have become mainstream in the U.S. According to NBC News, they are no longer just for those who don’t have a bank account.

However, just like a lot of things in life, prepaid cards do have a downside. Besides the fact you won’t be able to get rewards and points as you get on credit cards, It’s important to consider the pros and cons before deciding if getting a prepaid card is the best choice for you.

Pros
Cons
Control Spending
Fees
No Credit Check
No Credit Building
Privacy
Less Security
Convenient
No FDIC Insurance
No Credit Risk

If you know that having a credit card is too risky for you, you can always get a prepaid card to avoid accruing debt. Prepaid cards are great for teens and college students. 

A regular debit card wouldn’t be bad for them as well. It’s best to know whether or not your prepaid card or debit card overdraft feature allows you to overspend. You can always turn this feature off if you prefer not having it.

There are no requirements to get a prepaid card. Since you aren’t borrowing money, the issuer won’t do a credit check to issue you a card. 

This is a great option for those with low credit. In addition, it’s a great option for young adults who don’t have credit built up and would like to build their credit

Some individuals may even live a life with no debt or credit scores. On the other hand, those who have a record of writing bad checks have a difficult time with certain card issuers.

Prepaid cards aren’t linked to any of your personal or financial information. This means that your information can’t be hacked or stolen.

Prepaid cards allow you to deposit funds in a number of ways. 

You can deposit through direct deposit, transfer from your checking account, add funds at the issuer’s institution or retail locations that have this option available.

The issuers such as Mastercard or Visa don’t report your card activity to the 3 major credit bureaus. This means you won’t receive credit change notifications.

Getting a prepaid card with zero fees is highly unlikely. 

Issuers typically require you to pay for activation, ATM withdrawals and more. Even though there aren’t many free prepaid cards, there are some that have fewer fees.

Even though a prepaid card doesn’t impact your credit report, it won’t help you to build it either.

 The credit bureaus don’t factor in your prepaid card history when they compute your credit score.

 Issuers don’t provide the best security for prepaid cardholders. The quality of security varies depending on the card issuer. Some issuers offer better security features than others.

The good news is that effective April 1, 2019, the Consumer Financial Protection Bureau’s new rule will give prepaid card issuers guaranteed legal rights to receive protection against loss and theft.

If your bank plummets, the government will offer up to $250,000 of your money that was in your bank account. It’s not the same for prepaid cardholders.

Some of the top prepaid cards might be eligible for FDIC “pass-through insurance,”. It’s just that the individual has to meet certain requirements.

Prepaid Cards vs. Credit Cards

The same as debit cards, prepaid cards are different from credit cards. This may seem confusing because issuers apply for prepaid cards with the Visa, MasterCard, American Express, or Discover logos. The difference is that when you use a credit card, you are borrowing money.

When using a prepaid card, you are spending the money you previously loaded to your account.

Reloadable Vs Non-Reloadable: What's The Difference?

Moreover, prepaid cards come in two forms: reloadable or non-reloadable, such as gift cards. Issuers don’t bill you for having a prepaid card unless they associate fees with them.

For example, you may have to pay an annual fee, or ATM withdrawal fee. However, if you decide to deposit while the fees are due, it’ll be taken directly from it.

If your annual fee is $25, your $300 deposit will be $275 when it clears. Most fees are typically low; they also vary depending on the provider. You have to do your research to find one that you can afford.

Furthermore, having this card is safer than carrying loads of cash. Your transactions are secure by PIN. If you ever lose your card, it’s replaceable since the credit card company has a record of your card on file. When you contact the company, they can shut down your lost card so no one can use it.

Top Offers From Our Partners

OpenSky® Secured Visa® Credit Card

Reports to 3 Main Bureaus
No Credit Check

avant card

No Security Deposit
Pre-Qualification

Indigo card

Pre-Approval
Reports to 3 Main Bureaus

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

FAQs

You can load money onto the Cash App Visa® Prepaid Card from Cashapp and use it for a variety of purposes, including online payments, in-person purchases, ATM withdrawals, money transfers, etc.

Prepaid cards are available for purchase at retail establishments (such supermarkets and drugstores), online, over the phone, or from some banks and credit unions.

Yes. You can use prepaid gift cards with the Visa®, MasterCard®, American Express®, or Discover® brand anywhere in the United States where PayPal is accepted.

Gift cards from specific retailers are not covered.

By inputting the card number, expiration date, and the three-digit CVV code located on the back of the card, you can use your card to make purchases online.

On occasion, websites will request the name on the card; in these cases, just type “Gift Card” in the box provided.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Search
Best Cards Per CS
Offers From Our Partners

Milestone® Mastercard®

Annual Fee:
$175 the first year; $49 thereafter
APR:
35.90%

upgrade cash rewards

Rewards Plan:
1.5% 1.5% cash back on payments
Welcome Bonus:
$200 Earn a $200 bonus after you open & fund a Rewards Checking Plus account & make 3 debit card transactions within 60 days. If you previously opened a checking account through Upgrade or do not do so as part of this process, you are not eligible. Payout made within 60 days of meeting the conditions.
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.
Top Offers From Our Partners

upgrade cash rewards

Rewards Plan:
1.5% 1.5% cash back on payments
Welcome Bonus:
$200 Earn a $200 bonus after you open & fund a Rewards Checking Plus account & make 3 debit card transactions within 60 days. If you previously opened a checking account through Upgrade or do not do so as part of this process, you are not eligible. Payout made within 60 days of meeting the conditions.

Milestone® Mastercard®

Annual Fee:
$175 the first year; $49 thereafter
APR:
35.90%
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.

#1 In credit Cards

Our Newsletter

Sign up to our newsletter for secret credit card tips, insider advice, and exclusive deals straight to your inbox

Start saving smarter with

Our Credit Card Newsletter

Sign up for our newsletter and gain access to expert advice,
insider knowledge, and exclusive offers