What Is a Prepaid Debit Card and How Does It Work?

Prepaid debit cards open up a world of options, allowing you to buy things online, pay bills through web portals, and budget more effectively for things you need every day. 

Although you can live without a prepaid debit card, having one could simplify your life and ease many financial transactions.

What Is a Prepaid Debit Card?

A prepaid debit card is a tool for making purchases using money that you already have. It’s a debit card that only allows you to spend the money that’s in the account. You can repeatedly reload the account with money and use the card again. Prepaid debit cards open up digital transactions to people who don’t have traditional bank accounts. And, unlike with credit cards, you’re only spending your money. You can’t accumulate debt using a prepaid debit card.

How Does a Prepaid Debit Card Work?

In stores or online, prepaid debit cards work just like traditional debit cards or credit cards. Prepaid debit cards are simple to set up and use.

It’s a straightforward process:

Step 1. Load money onto your card.  

Depending on where your card comes from, you may need to visit a retailer, a bank, or another institution to load money onto your card.  Most will take cash, making it simple to get the right amount of money on your card. You could also fund your card by making an electronic transfer from a bank account.

Step 2. Make purchases.

Once it’s loaded, use your prepaid debit card just like a credit or debit card. Buy groceries or pay bills with a swipe or online, check your balance, and repeat. You won’t be able to make any new purchases once your balance hits zero, or if the transaction exceeds the balance available on your card.

Step 3. Reload.

You can load more money onto your prepaid debit card any time you like. How you do this depends on your chosen card, so ask when reviewing your options. Some allow you to reload at a retailer or a bank, while you can reload others online using a bank account.

Prepaid debit card vs. standard debit card vs. credit card

Prepaid debit cards, standard debit cards, and credit cards look alike.  And, for the cardholder, they function in much the same way.  Each of these cards can be swiped or tapped at a register, or used online to make purchases or pay bills.

With a credit card, you can make purchases now and pay for them later. A debit card only spends money you already have, so you don't accumulate debt or accidentally overspend. Just like the name implies, you prepay for your purchases. A debit card requires that you have money in the account before you use the card. This could help prevent overspending or getting into an overdraft situation.

Pros and Cons of Prepaid Debit Cards

Of course, debit cards have pros and cons which you should consider carefully before choosing to use them.

Pros

No risk of debt. Unlike a credit card, a prepaid card only uses money you already have.  You can’t accidentally overdraft a prepaid debit card like you might a standard debit card, so your risk of new debt is zero.

Budgeting and expense control. Since you must load your prepaid debit card to use it, you know exactly how much is on it. That means you can’t say to yourself that you’ll just spend $50, and then impulse-buy something for $75. If you only put $50 on the card, that’s a hard spending limit.

No credit check. You don’t have to authorize a credit check to get a prepaid debit card. There is no minimum credit score required.

Cons

Fees. Prepaid debit cards tend to have fees. There may be fees for reloading the card, checking your balance, using an ATM, and making transactions. 

Won’t help you build credit. No debit card, prepaid or otherwise, helps you rebuild your credit.

Limited financial protections. Prepaid debit cards offer some protection against fraud and theft. If you report a lost or stolen card immediately, you won’t be held responsible for unauthorized charges. If you lose a prepaid card that you didn’t register in your name, there would be no way to be reimbursed for fraud or theft. 

When to Consider a Prepaid Debit Card

Here are a few times when prepaid debit cards come in handy:

• You’re in a debt settlement program and need to control your spending. Since you can only spend what you load onto your card, keeping your spending under control could be easier with a prepaid debit card. 

• You want to avoid taking on credit card debt. Credit cards are helpful in some situations, but if you’re trying to minimize or eliminate your debt, taking on new obligations won’t help you. Prepaid debit cards give you a different way to pay, and they don’t risk creating debt.

• Alternative to a bank account. You could use a prepaid debit card account just like a bank account. For example, you could have your paycheck deposited straight into your prepaid debit card account. If you receive government benefits like Social Security and you don’t have a bank account, the government might provide you with a prepaid debit card instead.

• Manage someone else’s spending. A prepaid debit card is a great way to monitor and limit someone’s spending. You could give your teen their allowance on a prepaid debit card instead of cash. They could even load the prepaid debit card into their mobile wallet and pay with their phone.

Prepaid Debit Cards vs. Credit Cards: Key Differences

Although they work very similarly at merchants, prepaid debit cards and credit cards have a few key differences, including: 

• Your credit history. Prepaid debit cards don’t involve credit, so they don’t impact your credit score or history. Credit cards do. A credit card account could help build good credit over time if you pay your bill on time every month and keep your balance low or very low. A credit card could also hurt your credit if your balance is too high or you miss payments. 

• The money you spend. With a prepaid debit card, you spend your money every time you make a transaction. With a credit card, you’re borrowing money with every transaction—and that borrowed money may accumulate interest if not paid back promptly and in full.

Can a Prepaid Debit Card Help with Credit Card Debt?

By using a prepaid debit card, you can learn good spending habits and personal accounting methods that work for you. You’ll also avoid new credit card debt, which is vital if you’re going through a debt settlement program. In these indirect ways, prepaid debit cards can help with credit card debt.

If you’re struggling with high credit card debt, consider options like debt settlement to reduce the balances you owe.  Prepaid debit cards can be a tool in your debt settlement arsenal. 

How To Choose The Right Prepaid Debit Card

Since prepaid card fees are all over the map, it’s a good idea to research a few options before choosing one. 

For example, if you tend to make a lot of small transactions throughout the month, look for a card that has no transaction fees. Those cards will likely have a monthly maintenance fee instead. On the other hand, if you don’t plan to use the card often, consider one that has a small transaction fee but no monthly maintenance fee.

You’ll need to check out reload fees, too. If you often go to a particular retailer who will reload your card, that is a better choice than getting a card through a bank that’s out of your way. 

Avoid cards with excessive fees or hidden charges.

So, what can a prepaid debit card do for you? It allows you to make digital transactions without the risk of accumulating new debt.