How do prepaid cards work?

Thinking about picking up a reloadable prepaid card? There are more than a dozen types on the market now, and plenty of variations that can make them a wonderful or terrible financial choice. Here’s what you need to know about general prepaid cards: how they work, when to use them and how to get one.

What is a prepaid debit card?

Prepaid cards look like credit cards and spend like credit cards, but there’s no credit behind them. They are technically debit cards – when you use them, you’re spending your own money, not the bank’s. This means you won’t pay interest on a prepaid card as you might with a credit card.

Since prepaid cards are associated with major card networks — Visa, Mastercard, American Express and Discover — they can be used anywhere debit cards can: to buy groceries, fill up on gas and even pay bills online.

One downside of prepaid cards is hidden fees. Unlike credit cards, which by law must disclose their terms and conditions upfront, no regulation forces prepurchase disclosure of fees on prepaid cards.

According to the Consumer Financial Protection Bureau, some of the common fees associated with prepaid cards include monthly fees, transaction fees, inactivity fees and even fees for paying bills. Fee structures vary, so it’s important to read the disclosures.

Debit cards vs. prepaid cards

Unlike traditional debit cards, you don’t need a bank account to use a prepaid card. You just load dollars directly onto the card and then use that balance for purchases. When the balance on the card dips too low, you reload more money.

For more than 7 million households that don’t have a checking account, prepaid cards can offer the ease of card-based purchases without the requirement of a bank account.

Similar to a regular debit card, a prepaid card will not require a credit check. On the flip side, it also won’t help you build credit since spending on prepaid cards and debit cards is not tracked by credit bureaus

And like regular debit cards, prepaid debit cards offer certain protections. Even those not issued by a bank offer the zero liability protections of the payment network noted on the card, such as Mastercard or Visa. If you report the loss or theft of a registered card to the issuer in a timely manner, most will restore your original balance and issue a new card.

In other words, a prepaid card works like a debit card, minus many of the risks and, of course, the bank account.

When do prepaid cards make sense?

The popularity of prepaid cards is undeniable and due in part to their versatility. Here are some common reasons you might prefer a prepaid card over other options:

• You have poor credit or no credit: While there are credit cards for those with poor credit, if you’d rather not go that route, prepaid cards can offer the convenience of a card for short-term spending.
• You want to avoid overspending: It’s impossible to spend beyond your means with a prepaid card – it expires when the preloaded dollars run out – which makes it a useful first card for teens or those recovering from debt.
• You don’t have a bank account: Since prepaid cards are preloaded, you don’t need to link up a checking or savings account to use one.
• You don’t want to use cash: If you don’t want to carry around a wad of cash while traveling, or just generally don’t feel safe operating on cash alone, a prepaid card is a good alternative.
• You want to share travel expenses without a credit card: If you’re traveling with someone and you both want to put cash toward shared expenses, jointly loading cash on a prepaid card might be a solution. This way, you can use prepaid cards to book a hotel room or rent a car without relying on one person’s credit card or either of you having to reimburse the other.

How to get a prepaid debit card

When choosing a prepaid card, look for one that fits your specific needs. For instance, some prepaid cards let you pay bills online and even handle automatic monthly payments. Some will make payments via electronic check issued by the card company or let you withdraw cash from an ATM using a special PIN.

Managing your prepaid card is easier than ever with online account access. Many cards such as Green Dot, the Walmart MoneyCard, and Amex’s Bluebird and Serve and offer apps to manage your accounts straight from your phone. Need to put more cash on your card? You have five options:

1. Transfer money from a bank account.
2. Have your employer direct-deposit your paycheck onto your card.
3. Transfer money from a PayPal account.
4. Reload it at a retail store, such as Walmart or Walgreens.
5. Use a reload card, which works like a gift card.

Bottom line

A prepaid card allows you to load your own money and use it for transactions. Considering that no credit is extended, such cards will not help you build your credit history.

These cards are particularly useful for people without bank accounts or those facing credit issues, but they offer many features and anyone can use them. While prepaid cards come with certain consumer protections, watch out for hidden fees.