In a world where consumers are increasingly wary of credit even as they want the convenience of plastic, the idea of prepaid debit cards is catching on. Prepaid debit cards (also known as "prepaid credit cards") are branded with the logo of well-known credit companies, and they are accepted where credit cards are used.
A prepaid debit card is not the same as a credit card. It is also not the same as a regular debit card. In some cases, a prepaid card is even used as an alternative to regular checking (and sometimes savings) accounts.
Looks Like a Credit Card...
A prepaid card carries a credit card brand logo (often carrying the Visa or MasterCard logo), so at the cash register, it acts the same as a credit card. However, a prepaid card is not a credit card. A credit card offers you a line of credit that you can draw on. You borrow every time you use a “regular” credit card. When you use a prepaid debit card, though, you are drawing on money that you already have. In order to use a prepaid card, there already has to be money, deposited up front, associated with the card.
...Acts Like a Checking or Savings Account
Prepaid cards are also sometimes used as alternatives to bank accounts. Because they work like a credit card or a debit card, it’s possible to use them as forms of payment at the store, as well as to pay bills (including online bill pay and automatic withdrawal). You can add money to the card, including having it automatically deposited from your paycheck.
In some cases (but not all), it is also possible to designate some money as “savings” and earn interest on it. A credit card charges you interest; a prepaid debit card gives you a chance to earn interest.
Prepaid cards are very straightforward. You purchase the card, and you “load” a certain amount of money on it. You designate how much money you want to access with the card, and deposit the money.
How to Put Money on a Prepaid Debit Card
There are different ways to deposit the money on the card:
Once the money is loaded onto the card, you can use the card just as you would a credit card. Additionally, it is often possible to use your prepaid card as a method of bill pay (including online bill pay), as well as withdraw cash from an ATM.
Prepaid Cards Are Not Credit Cards
While a prepaid debit card has the look and feel of a credit card, there cannot be enough emphasis on the fact that a prepaid card is not a credit card. You can’t charge more money than you have, so once you have used the money on your card, you need to add more funds if you want the card to keep working.
Additionally, your prepaid card will not impact your credit score in any way, no matter how often you add money to your card.
Prepaid cards are not for everyone. Here are some things to consider.
Cons of Prepaid Cards
Prepaid cards have been disparaged quite a bit recently due to the number of fees usually charged by issuers. Even though there are advantages to prepaid cards, including the fact that you get the convenience of plastic without worrying about high interest rates, the fees charged can be a big turn off for many consumers.
One of the most common fees amongst prepaid cards is the monthly maintenance fee. On top of that, many prepaid cards charge you for calling customer service, inquiring about your balance, reloading the card, activating the card, and engaging in other actions. Just using a prepaid card in a way that many consumers consider “normal” can lead to fees. As the fees add up, they erode the actual amount of money you have access to.
Another drawback, at least for those hoping to rebuild their credit, is that prepaid cards don’t usually report your behaviors to the credit bureaus. Because you aren’t actually receiving a line of credit, the use of a prepaid card won’t help your credit score.
Pros of Prepaid Cards
The main advantage offered by prepaid cards is that they can often offer banking-type services to those who don’t have bank accounts. If you can’t qualify for a bank account for whatever reason, a prepaid card can offer an alternative, especially since many cards are expanding their offerings to include savings accounts and bill pay.
Another advantage with some cards is that you can earn a yield if there is a savings option. Not all prepaid cards offer a savings option, though. And, among cards that do offer a savings option, not all of them will pay you an interest yield.
One of the first things to look for as you choose a prepaid card is the fee schedule. Pay attention to the number of fees charged and the actions that incur them. Try to find a card that charges minimal fees, or that offers a way to waive certain fees.
Another consideration is the variety of offerings. Think about what you plan to use the prepaid card for:
Here are a few good options when choosing a prepaid card:
1. Mango Money
Here’s a prepaid card for serious savers. The Mango Money prepaid card allows for you to save money, and it offers an APY of up to 6% (best results are for those signed up for direct deposit and have $5,000 in their accounts). Even the 2% APY offered on many balances beats many “high yield” accounts.
There is a monthly fee of $5. However, if you load at least $500 each calendar month, you receive a $5 credit. There are ATM fees, but they aren’t out of the ordinary, and you can check your balance online for free.
This is a card for serious savers who will add money regularly, and want a better yield than what is offered with a regular savings account.
2. American Express Prepaid Card
There are two options if you want an American Express prepaid card. The simply-named Prepaid Card offers direct deposit, and there are no monthly fees, activation fees, or reloading fees.
You do need to have a bank account to make use of the full range of available features, including reloading the card. This card has absolutely no fees, but you do need a regular checking or savings account, and there is no interest on the loaded funds.
This is not the card for the unbanked, but it can be a great pick if you want to use it for allowance.
3. Green Dot Card
The Green Dot Card has long been known as a leader amongst prepaid cards. You can avoid an activation fee by purchasing the Green Dot card online, and there are no ATM charges. The monthly fee is $5.95, but it’s possible to avoid paying the fee if you load at least $1,000 to the card each month. This includes direct deposits from work. You can also make 30 purchases a month with the card in order to avoid the monthly fee. This card also comes with a daily spend limit, so you can’t get too crazy with it. The Green Dot is another ideal card for the straightforward spender, or to use as an allowance card.
4. American Express Bluebird
Another option is the American Express Bluebird Prepaid Card. This card features many of the same perks you find with traditional credit cards, including fraud protection, roadside assistance, purchase protection, and free customer service.
You can use direct deposit from your employer to add funds, in addition to a linked bank account. If you want to add funds by register purchase, you will have to get a “feeder pack” for the amount you want. However, there is a $1 surcharge when you use the feeder pack, rather than direct deposit or fund transfer. The only fees charged on this card are $2 ATM fees, charged after the first free withdrawal each month.
This is a great alternative for those who want the credit card perks, without the credit, or who want to use it as an allowance.
5. Approved Card From Suze Orman
Even though Suze Orman received a lot of flack for this card, it does have something that not every prepaid card has — a savings option. You can set aside money with this card, eliminating the need for a bank account.
There is a $3 monthly fee, but that is lower than many other monthly fees. You’ll pay a $3 activation fee, and there is a list of other fees you’ll pay, depending on what you try to do.
But for the user who doesn’t require a lot of help and who wants to set aside money (you won’t earn interest on the deposit), the Approved Card isn’t so bad. This is a card that can be used by the unbanked.
For the most part, prepaid cards should be used by those who can’t qualify for a bank account, for whatever reason. There are still plenty of free checking and saving accounts available, and you should turn to those before deciding that a prepaid card is the way to go. The only exception is the Mango Money card, which offers better yields than normal checking or savings accounts.
Among the 5 Prepaid Debit Cards, I prefer the American Express Prepaid Card most. The fact that it doesn't have much fees edges it out compared to the other prepaid debit cards. Although the rewards program of Wired Plastic Visa is enticing, the accompanying fees aren't.
I don't have any thoughts yet about getting one but this article has given me great insights on these kind of cards. Thanks a lot Miranda.
P.S. Personally, what would you prefer, a prepaid debit card or a credit card? :)
Hey Charlie,
Thanks for dropping by. I personally don't use prepaid debit cards. I prefer credit cards. But mainly because I like to rack up the rewards -- without paying interest. So many prepaid cards come with fees and hassles. If I were to choose a prepaid card, though, I would probably use the Mango card, and deposit money regularly to avoid the fee. The yield is pretty solid. I would use it as a savings tool.
I know that not everyone can get it, but for those who can, I highly recommend the USAA Prepaid card. It's intended especially for tweens & teens as a way to learn to handle their money. There are no fees & it's really simple to setup online.
https://www.usaa.com/inet/pages/youth_prepaid_spending_card_main
I'm thinking of getting one of these to use for purchasing gas, right now the way I budget is the envelope system, but I think this would be more convenient since I could use pay at the pump.
I use the Rush prepaid debit card. There is free direct deposit and you can use it to pay bills online with no cost.
Now there are some costs involved. There is an activation fee. If you add money to the card (Walmart) there is a fee. Every time you use the card for a swipe purchase there is a fee but there is no limit to the amount you an use or take as cashback. I would take out all the money I could when I needed it.
But I found that I could manage my money easily. The fact there was a fee on each swipe stopped many of my impulse buys, saving me money.
Someone has stolen my debit card information and has been using it for online purchases. This card was used primarily for bill pay and online prchases. My brother recommended that I stop using my debit card online and suggested that I buy amazon or itune gift cards instead. Which would be more advantageous - A prepaid credit card or amazon/itune gift cards? Thank you in advance for your insight.
I agree that you should not use a debit card attached to your checking account online. The protections with a branded debit card, while similar to those offered by credit cards, are not quite the same. And it pulls from your checking account, so that can be a serious problem. A prepaid DEBIT card can be an option. You can also use PayPal at many merchants. Also, a regular credit card can be a good choice.
