How do prepaid debit cards work? Everything you should know
January 26, 2024
Debit cards have their perks. They give you an alternative to cash, can help you control spending, and allow you to conveniently check out anywhere that accepts plastic.
However, traditional debit cards are vulnerable. A criminal could get a hold of your card and PIN and make purchases your bank is unlikely to reimburse. And even with day-to-day spending, you might accidentally overdraft the account and owe bank fees.
Prepaid debit cards are an optimal solution for anyone who wants a short-term, non-credit option that can’t overdraft. Here’s everything you need to know about how prepaid debit cards work and when they’re the right choice.
What is a prepaid debit card?
A prepaid debit card is similar to a regular debit card, except it doesn’t pull money from a bank account. Instead, you put money on the card and can only spend that amount, similar to how a gift card works. Depending on the issuer, you can load the card up again when you run out of funds, often at an ATM.
Financial institutions and retailers partner with universally accepted companies like Mastercard, Visa, and American Express to issue prepaid debit cards. That means most retailers, both online and in-person, accept them as payment.
How do prepaid debit cards work?
You can use a prepaid card anywhere you’d pay with a credit or regular debit card by inserting or swiping it and entering the PIN. You could also make purchases online, inputting your prepaid card information instead of a credit card. Then, you’ll spend until there’s nothing left on the card and choose to reload or discard it. It’s also possible to transfer funds to the prepaid card from a bank account or set up a recurring deposit from an income source like a paycheck.
Prepaid debit cards can keep you from spending too much money or overpaying for subscriptions, and they also make great gifts instead of gift cards to specific stores. But the issuing bank may charge a fee when you make transactions, like purchases, withdrawals, and reloads, which means they’re not ideal for long-term spending.
How to choose a prepaid card
You don’t have to get a prepaid card through a bank or credit card company. They’re available everywhere from Walmart to PayPal. Each one will have different reload options, fees, and possible bank account connections, so shop around and compare to find the best option for you.
Here are some popular options:
Bluebird by American Express
PayPal Prepaid Mastercard
FamZoo Prepaid Card
ONE VIP Visa Prepaid Card
Greenlight Prepaid Mastercard
Movo Virtual Prepaid Visa Card
What’s the difference between a prepaid card and a debit or credit card?
Prepaid cards and credit and debit cards access funds differently. You have to load money on prepaid cards to use them, whereas debit cards pull from a bank account and credit cards from a line of credit.
Here are a few more distinctions:
You may incur fees per transaction with a prepaid card, which credit and debit cards don’t typically charge.
Some prepaid cards limit how much money you can spend or load in a certain period. This is usually lower than credit and debit limits.
Prepaid debit cards don’t impact your credit score, while credit cards do.
If the issuer experiences a technical failure, you won’t be able to use your prepaid card. Most debit and credit options will have more systems in place to make sure you can access your money if something goes wrong at the bank.
Prepaid cards don’t always come with banking resources like an online platform, making them less convenient to load and use.
Why use a prepaid card?
A prepaid might not be the right choice if you want to build credit or make major purchases that could surpass the card’s spending limit. But they’re a great fit in the following scenarios:
1. You wish to limit spending
You can only spend what you have on a prepaid card, which can keep you from spending above your means. If your goal is to limit your vacation meal budget to $200, you could deposit only this amount to a prepaid card, forcing you to use it mindfully.
2. You don’t like carrying cash
You might use cash to limit spending, like only taking $100 to the mall so you don’t spend more than that. But you’re out of luck if you lose your bills or visit a cashless retailer.
If you lose a prepaid debit card, you can report it missing and potentially get your money back, which you can’t do with cash. Prepaid cards also have the same limiting effect as cash — you only spend what you have — without the hassle of asking for change or realizing a merchant doesn’t accept cash.
3. You want to give a gift
With a prepaid debit card, you don’t have to worry about picking out the right sweater size or sneaker brand. You’ll give the gift of money — something everyone loves. Recipients can spend the money anywhere they wish, which makes this option more flexible than a gift card.
4. You don’t want to give your card information online
When you use a prepaid card, you don’t risk a cyber criminal getting hold of your real credit or debit card numbers, whether that’s through a hack or a large-scale data breach. If someone does access your prepaid card, they’ll only be able to access the money you have on there, not your entire bank account. You’re protected from fund or identity theft and potential damage to your credit score.
If protecting your banking data and credit history is your main concern, you could also use a masked card through IronVest. These virtual cards tokenize your actual credit card so you don’t have to provide your real one, protecting you from fraud. The funds you spend are pulled from your real debit or credit account for a seamless transaction.
What are the downsides of using a prepaid card?
Prepaid credit cards fill a niche in the market by offering a safe, convenient payment option — especially if you want to control your spending. But prepaid cards aren’t perfect. Here are a few downsides to consider:
Liquidity: All debit cards rely on having sufficient funds to pull from, so prepaid ones can only cover purchases you have the cash, or liquidity, for. If you only have $800 in your bank account, you couldn’t load a card with $1,000 and make a large purchase — a problem a credit card could solve.
Fees: Unlike regular debit cards, which generally don’t charge fees unless you overdraw them or don’t maintain a minimum balance, prepaid ones may dock you per transaction. This means you’ll lose a little money every time you use or reload these cards. If you’re using them often, this adds up.
Location limits: Many prepaid cards only work in the country where you purchased them, which means if you’re traveling, you can’t use them at all.
No effect on credit: Using your prepaid debit card won’t boost your credit score, no matter how effectively you manage it. Issuers track and report your credit behavior, not prepaid cards. If you hope to improve your ranking, you’ll need to use a credit card or manage a loan responsibly.
Less fraud protection: Prepaid debit cards can be a safer option for people who don’t want to make purchases using their actual banking data. However, prepaid cards don’t have the same fraud protections that credit cards often support. If you get scammed or robbed, there’s a way lower chance you’ll be able to report the problem and get your money back.
3 alternatives to prepaid debit cards
If you want to avoid the pitfalls of prepaid debit cards with another equally effective payment option, consider these alternatives:
Secured credit cards: If you’re hoping to improve your credit score, secured cards are a great option. This type of credit card requires a security deposit, which you only get back if you pay bills correctly and on time. After that, you can spend up until your limit. You’ll experience more freedom than with a prepaid card while building your credit score.
Virtual cards: These cards, such as IronVest’s virtual cards, allow you to use a temporary card number for online purchases. They mask your actual checking or credit card number, so if someone sees the number, they can’t use it to access your account. The only difference is that payment processors never get a hold of your real digits, making this a safer choice. Some options also let you set limits on how much you can spend. IronVest even lets you add biometric authentication to virtual cards, so no one else can use them even if they steal the number.
Checking and savings account: Opening both a checking and savings account can help you manage spending with more flexibility than a prepaid card. You can keep long-term funds in the savings account — earning bank interest — and only move what you need into your checking. That way, you can’t spend more than you allow.
Safer, smoother transactions with IronVest
Prepaid cards come with savings-friendly perks, but they aren’t the most convenient option for every situation. In the long run, you’ll need a solution that prioritizes both safety and sustainability.
Enjoy safe, seamless transactions with IronVest’s super app. It’ll generate a temporary card for secure online payments so you never have to reveal real account or credit card information. With your subscription, you’ll also get masked email addresses and biometric account security so only you can see and spend your money. Get IronVest today and take control of your digital security.