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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.

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Note that neither a prepaid card nor a debit card helps you build credit. If that’s important to you, a secured credit card can serve all the same functions as a debit card and also help you build credit.

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.

Prepaid cards

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. For that reason, people with poor credit and young consumers sometimes opt for prepaid cards.

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 usually 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.