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What Are Prepaid Debit Cards? How Do They Work?

Take the next step toward your economic future in a methodical way.

Isaiah Elysee
Isaiah Elysee

This can be the card to bring ease and simplicity to your daily financial activities and decisions. Take the next step toward your economic future in a methodical way.

Growing and saving capital have been highlighted in our society for several years. Individuals have opted into securing and improving their financial positions to provide a better life for themselves and their families. A great option to achieve these goals is by using a prepaid debit card. The process of obtaining a prepaid debit card is simple, and it helps to learn what these cards are, what they do, and how they can benefit you. With the popularity of prepaid cards growing rapidly–an estimated 23 million adults regularly use them according to MoneyGeek–learning about and leveraging these cards is imperative.

1.    How Do Prepaid Cards Work?

Prepaid debit cards are less complicated than one may initially presume. The best way to view these cards are like gift cards. Owners deposit a certain amount of funds into the card that will be available for the time being until they spend it, making them a superb alternative for cash. Prepaid cards can be used for most purchases, whether it be online or in-person, to assist with easy payments.

2. Three Types of Prepaid Cards

Within the realm of prepaid cards, consumers have the option to choose between three main forms. Though there are more options out there, these three cards are the most prevalent of them all, which is why we have mentioned them in this article. Each type of card can serve a particular purpose for the buyer, making it essential to recognize the differences and benefits of each.

Photo by Christian Wiediger on Unsplash
  • General-Purpose Reloadable Cards

The general-purpose reloadable card is the type that we are referring to throughout the article.   You load money into it, and then use it like you would a debit card. These reloadable cards are usually branded by networks like MasterCard, Discover, or a Visa Card. Like any credit card, they can be utilized just about anywhere and for almost anything.

  • Gift Cards

Gift cards are a widely used option, where each card holds a specific monetary value. Once you use up the funds on the card, it is thrown away, as it cannot be reloaded. Card holders can only use these gift cards at its specific store. For instance, a Starbucks gift card can solely be used at Starbucks. There is limited to no store crossing when it comes to these cards.

  • Payroll Cards

Payroll cards are remarkably interesting, as they are aimed at employees who can receive cards that are loaded with their paycheck amount. Rather than receiving a check or an electronic deposit into their bank account, individuals will receive this card. The process is simple, sweet, and quite strategic, creating opportunities for workers to distribute their funds as they wish.

3.    Debit Cards, Prepaid Cards, Credit Cards: Similarities & Differences

In case you were confused, there are some notable distinctions amongst debit, credit, and prepaid cards. Though they host similar features and are usually physically identical in their size and shape, each type of card has unique uses.

  • Prepaid Cards

One of the huge distinctions with prepaid cards is that they are not connected to any checking or savings accounts. Though they work like a debit card, having a bank account connected to the card is unnecessary, as you only spend money that has been deposited into the card via check or cash. When it comes to prepaid cards, once your balance hits zero dollars, the card will no longer function unless more cash is added in.

The main feature of a credit card is that you are borrowing money from your card lender. The cash you borrowed must be paid back by the due date, lest interest gets charged. Credit cards will have a direct impact on one’s credit score, making it important to be responsible when spending and paying your dues. If you make your payments consistently on time, you will build a good credit score, helping you pull out loans with desirable rates in the future. However, if you neglect this, your score will decrease and notify future lenders that you are not trustworthy–ultimately requiring you to pay higher rates on new loans. Credit card owners must be extremely cautious to avoid falling deep into debt by overspending capital they do not have.

  • Debit Cards

A debit card is most like a prepaid card aside from the fact that they are issued by your bank and linked to your checking or savings account. The funds in your account are 100% yours and there are no interest charges like with credit cards. The one issue owners should be aware of are overdraft fees and policies, which vary from bank to bank.

Photo by freestocks on Unsplash

4.    Benefits of Prepaid Cards

Prepaid cards can provide users with various features if they are strategically applied. With so many unique benefits, it is difficult to neglect how this card can be an effective financial tool to possess. The positive impact these prepaid cards have include, but are not limited to the following list:

  1. Users cannot get into debt. Because these cards are built to only allow holders to spend the amount of money deposited on the card, there is no way they can fall into debt using this card.
  2. There are no interest charges due to the lack of credit in the card.
  3. Card thieves cannot take your information because there is no banking, checking, or savings account information on the card.
  4. If you lose your card, you will not lose all your funds, just the amount that is currently on the card you have misplaced.
  5. These cards can help you avoid overspending.
  6. The approval process is quick and simple, as there is no required FICO score, just the amount you are looking to deposit.
Photo by Jp Valery on Unsplash

5.    Drawbacks of Prepaid Cards

Now that we have looked at some of the benefits of prepaid cards, it is time to take a glance at where these cards may cause some heartaches for holders. As owners of prepaid cards, it is imperative that you take heed to this information, as it can make a difference on how you use your card.

  1. Prepaid debit cards cannot help improve your credit score.
  2. Though these cards are usable in most situations, there are some that will not take your payment method. For example, hotels will not let you hold a room through means of a prepaid card, requiring you to utilize a different card for your reservation. There are many reasons as to why this rule would apply, and there are a few other institutions that will also reject payment via a prepaid card.
  3. The cards tend to have fewer fraud and billing protections than credit cards.
  4. Due to varying fees and charges, prepaid cards can become a bit more expensive than having a checking account and using a debit card.

Below is a video that can help you determine the best prepaid debit cards that have limited to no fees in 2021. This video can assist you in evading some of the potential drawbacks on prepaid cards.

Video by Annie Margarita Yang on YouTube 

6. Final Thoughts

In summary, prepaid cards are a smart tactic for anyone looking to be fiscally responsible . According to credit.com, nearly 10 million households in the United States have no bank account. This makes simple tasks like paying bills and making purchases become difficult and inconvenient. This is where prepaid cards can really shine, making the payment process simple while creating financial security in multiple ways. Though they may not be the best option for everyone, there is no denying that these cards truly have become a crucial aspect of financial management within our communities.

Personal Finance