What is a prepaid card and how does it work?
Similar to debit and credit cards, prepaid cards can be used to make purchases. But unlike those cards, a prepaid card comes with a balance that acts as a spending limit. Once you’ve spent the balance, the card can’t be used until you add more money to it.
Keep reading to better understand prepaid cards.
What you’ll learn:
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Like credit and traditional debit cards, prepaid debit cards can be a simple and safe alternative to carrying cash.
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Prepaid cards can be used to make purchases as long as you hold a balance.
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There are often fees associated with prepaid debit cards.
What is a prepaid card?
You can use a prepaid card to make purchases or pay bills—the same way you would with a credit card or debit card. But similar to a gift card, a prepaid card is loaded with money in advance. You might hear prepaid cards referred to as prepaid debit cards, prepaid credit cards, pay-as-you-go cards or stored-value cards.
How do prepaid cards work?
You can generally buy prepaid cards at banks or retail locations like grocery stores and drugstores. The cards come with either a set available balance or an option to load money onto the card. From there, you can use the card until you’ve depleted the balance. Once the money runs out, you won’t be able to make more purchases until you reload the card.
A prepaid card functions in some ways like other cards. This means you can swipe it at or insert it into point-of-sale systems to make your purchases and, in some cases, use it at ATMs for cash withdrawals.
Prepaid card vs. debit card vs. credit card
A key factor that differentiates prepaid cards is that they aren’t linked to a bank account like debit cards are, and they aren’t linked to a line of credit like credit cards are.
When you use a prepaid card, you’re only using the money that you’ve loaded onto it. You aren’t borrowing any money, and the card doesn’t draw from any other financial accounts you may have.
That’s why you need to reload an empty card with more money if you want to continue using it.
Why use a prepaid card?
There are several situations where a prepaid card could be helpful. Here are some of them:
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You don’t want to carry cash. A single card can be easier to carry than a wad of bills, and it may also be a safe alternative to cash.
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You want an extra layer of security. While a stolen prepaid card can be easy to use, a thief will only have access to the balance on the card—unlike a debit card, where they may be able to overdraw an account.
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You want to limit your spending. A prepaid card can help you avoid spending more than the balance available on your card.
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You need a checking account alternative. If you don’t have a checking account but want the convenience of using a card instead of cash, you may opt for a prepaid card.
- You don’t want to impact your credit scores. You don’t need a credit check to purchase a prepaid card, so it could be a helpful short-term credit card alternative.
Disadvantages of a prepaid card
While there are some situations where prepaid cards might be helpful, they can come with certain disadvantages.
Multiple fees
One important thing to consider before choosing a prepaid card is whether there are fees associated with certain actions. According to the Consumer Financial Protection Bureau (CFPB), you may be charged fees of varying amounts for several reasons, like:
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Withdrawing cash
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Making purchases
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Reloading your card
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Checking the balance on your card
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Transferring money between cards
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Not using your card for a certain amount of time
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Making foreign transactions
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Using your card every month
Fewer protections than credit or debit cards
The government has taken steps to provide legal rights for prepaid cardholders, like options for reimbursement if you lose your card or have it stolen. For example, you may need to register your card to get assistance from the card provider. Additionally, there’s a time limit for disputing charges. After that, you may be considered responsible for them, even if fraud is involved.
No effect on credit score
Prepaid cards are treated similarly to traditional debit cards associated with a bank account where activity isn’t reported to the three credit bureaus. Your credit history won’t grow and your credit scores won’t decrease from applying.
How to choose a prepaid credit card
If you decide a prepaid card is right for you and are shopping around, there are a few things you should consider. It’s important to find out what fees you’ll have to pay and compare multiple cards to find the one with the lowest fees. When it comes to convenience, you’ll want to ensure the card has a large ATM network at locations near you and that it’s free to use at the ATM.
Prepaid card alternatives
If your goal is to establish credit, you might consider applying for a traditional credit card. If that’s not an option, there are other ways to build credit from scratch, like applying for a secured credit card.
For anyone having trouble qualifying for a traditional credit card, a secured credit card might be a good alternative to a prepaid card. Even if your credit scores are considered bad or poor, a secured card might be an option to help build your credit with responsible use.
CreditWise from Capital One shows you key factors that may impact your credit scores. Plus, you’ll get email alerts when something meaningful changes on your TransUnion® credit report and more. Using CreditWise to keep an eye on your credit won’t hurt your scores. And it’s free for everyone, not just Capital One cardholders. You can also get free copies of your credit reports from all three major credit bureaus at AnnualCreditReport.com.
Prepaid card FAQ
Take a look at the following frequently asked questions about prepaid cards to better understand how this type of card works:
How do you put money on a prepaid card?
Once you’ve used the balance on a prepaid card, you have to add more money to it if you want to keep using it. There are several ways to do this:
- Deposit money directly to the card from a checking account or another prepaid card.
- Deposit money to the card from paychecks or other sources of regular income.
- Reload the card at a retail location or bank using cash.
- Purchase a reload pack to add a predetermined amount of money to your card.
Are there limits to how much can be added to a prepaid card?
Depending on the type of prepaid card, there may be a limit to how much you can add and reload at once. There may also be a limit to how much you can withdraw or spend. Check with the issuer to review their terms.
Do prepaid cards build credit?
The CFPB confirms that prepaid cards generally won’t help build your credit history. When you use a prepaid card, you aren’t borrowing money, and there’s no associated line of credit. That means activity on your prepaid card isn’t reported to any credit bureaus and doesn’t impact your credit scores.
Does a prepaid card expire?
Prepaid cards can expire. The expiration date should be noted on the back or front of the card. If your prepaid card expires with funds remaining, reach out to the prepaid card company to see if the issue can be resolved through a replacement card or check. Keep in mind though that a fee might be charged to transfer the money.
Key takeaways: Prepaid cards
Prepaid cards generally allow you to make purchases in the same way as credit and debit cards. The key difference is that prepaid cards aren’t linked to a bank account or a line of credit. So to use one, money has to be loaded onto the card. Keep in mind that there may be fees to activate or use prepaid cards.
If you’re looking for an easy way to track and manage spending while still building your credit scores, you may want to consider a traditional or secured credit card instead. Compare Capital One credit cards to find the right option for you.
