Prepaid cards vs. debit cards
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A debit card is a payment card that draws on money from a linked bank account. A prepaid card is not linked to a bank account and instead draws on the money you load onto it. A prepaid card can be useful for people trying to budget or who don’t have a bank account. However, prepaid cards come with unique downsides, too.
If you’re trying to decide between a traditional debit card and a prepaid card, here are the key differences.
What is a debit card?
A traditional debit card is a payment card issued by a financial institution and is connected to money in a linked checking or savings account. Unlike a credit card, which is essentially a loan that renews each time you pay your bill, a debit card only allows you to use the money you already have in your account.
Who should use a debit card?
If you have a bank account, a debit card is a convenient tool. It’s more secure and convenient than carrying cash, and there are plenty of fee-free checking accounts on the market.
Downsides of debit cards
Compared to prepaid cards, traditional debit cards don’t have a lot of downsides. In other words: If you can get a traditional debit card, you should. That said, there are a few things to watch for, as with any financial product.
- Barrier to entry: Most banks and credit unions don’t check your credit score when you apply to open a checking account, but they can see your banking history. It’s rare, but sometimes banks deny applicants if they have a history of overdrafts, bounced checks or other risky behavior. On the other hand, prepaid cards can simply be purchased like any other retail product.
- Fees: There are many fee-free checking accounts, and prepaid cards generally come with more fees, but it’s something to watch out for.
- Minimum required balance: Some checking accounts require you to have a certain amount of cash tucked away, or else you’ll incur fees. There are plenty of checking account options without this requirement, but it’s important to look out for.
What is a good debit card?
When you choose a traditional debit card, you’re also choosing a checking account. Most major financial institutions offer debit cards, so it’s just a matter of picking your favorite. If you’re new to banking, you might like Capital One’s 360 Checking account. There is no minimum balance requirement and no monthly maintenance fee.
A prepaid card is like a debit card, but instead of linking it to a bank account to draw funds from, you pay upfront to load money on the card—like a gift card. You can continue reloading money onto the card over time.
Prepaid cards can be specific to a certain retailer or general-purpose (meaning you can use them anywhere). You can use prepaid cards to make purchases at stores or online, just like a traditional debit card.
In the past, prepaid debit cards were not accepted by most retailers. Today, you can use prepaid debit cards at most merchants in-store and online. However, there’s no guarantee that every merchant will accept prepaid cards, so it’s good to have a backup payment method.
Just like a traditional debit card, prepaid cards won’t allow you to make a purchase if you have insufficient funds in your account.
Who should use a prepaid card?
Prepaid cards may be a good option if you don’t have a bank account and can’t open one. They’re also handy for strict budgeters. If you have a bank account but only want yourself or, say, your child to spend $100 per week, you can load a prepaid card with that amount and only use that for payments.
Downsides of prepaid cards
Compared to traditional debit cards, prepaid cards have quite a few disadvantages.
- Fees: Many prepaid cards charge fees for reloading money, monthly maintenance, ATM withdrawal, inactivity and transactions.
- Purchase limits: You might be limited to a maximum purchase amount per day, like $1,000.
- Inability to deposit cash or checks: Many prepaid cards don’t give you the ability to load funds in the form of cash or checks, as you would be able to do for a checking account at an ATM.
- Lack of free ATMs: If you want to use an ATM to withdraw cash from your prepaid account, your options will likely be limited, and you’ll probably have to pay a fee.
- No cash back at retailers: With a debit card, you can sometimes withdraw cash from your account by asking for cash back from a retailer you’re making a purchase with. Prepaid cards often do not allow this.
- Less mobile app support: Mobile banking is convenient. With a debit card, you can usually check your balance, deposit checks and move money on your phone. Prepaid cards don’t usually offer mobile apps.
- Inconvenient to reload money: Every time you deplete your balance, you’ll have to reload funds on the card to keep using it.
- Not as secure as debit cards: Prepaid cards have fewer fraud protections in place than debit cards.
What is a good prepaid debit card?
If you’re looking to avoid many of the downsides of prepaid cards, the Bluebird® American Express® Reloadable Prepaid Card is a good choice. It has no monthly fees and free in-network ATM withdrawals. You can also load cash onto your card for free at Walmart.
The bottom line
Debit cards are payment cards that are connected to a bank account, from which they withdraw funds as you make purchases. Prepaid cards, on the other hand, are not connected to a bank account. Instead, you load money directly onto the card.
In general, it’s more convenient and secure to have a traditional debit card than a prepaid card. But if you’re unable to open a bank account or are on a strict budget, prepaid cards may be more accessible. When pursuing either option, be sure you understand all associated fees.