Hands of salesperson and client passing credit card for payment in bakery. concept: what is a prepaid card
Italia Martinez Vallejo
By: imartinezvallejo
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What is a prepaid card?

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With 8.4 million households with no bank account, Prepaid cards are becoming more popular by the day because they are a feasible solution. They are also great to control how you spend our money, and some companies even offer rewards (like the ones offered by credit cards).

If you find yourself thinking of getting a prepaid card, keep reading. you will find insightful information as we explain what is a prepaid card, its differences with other types of cards, as well as its pros and cons.

What is a prepaid card? 

Put simply, a prepaid card is a card to which you can add money and then use it to pay your goods in places where you would usually pay with a credit card or debit card. They are branded by well-known credit card companies such as Master Card, Visa, American Express or Discover.

Wallet with credit cards and money on the wooden background. Top view. Space for text. Concept: what is a prepaid card

But, how do prepaid cards work? 

First of all, to have a prepaid card, you don’t need to have a bank account, the money is added only to the card, which has an ID number that can be used to make deposits to it, even your employer can put money on your card. 

Once you used all the money on the card, you can load more money into it. While sometimes merchants do not accept credit cards due to the high costs, it is more likely that they would accept a prepaid card.

So, now you might be wondering: but, what’s the difference between this and a gift card and a debit card? 

Let’s start comparing!

What is the difference between a prepaid card and a gift card?

While they are both cards that can be pre-loaded with money, there are very big differences between the two of them.

A gift card is usually issued by a specific retailer, and you can only use it with them. Usually, once the money inside is used, you can’t reload it again. This type of card usually has expiration dates, and the money can never be withdrawn from an ATM. 

A gift card’s uses are more limited.

As discussed before, a prepaid card is issued by a financial institution and can be loaded several times It also allows you to withdraw money from ATM, you can use it in many different places, and the expiration date is way longer. 

It’s similar to a debit card however, there are also significant differences between the two of them. Let’s dig further.

Illustration of online payment with credit card. Concept: what is a prepaid card. Designed by rawpixel.com / Freepik

How are prepaid cards different from credit cards and debit cards?

The differences between a prepaid card and a credit card are more obvious. 

With a credit card you are borrowing money that you will later need to pay, and with a prepaid card, you’re just spending the amount you have inside, not a cent more. A credit card is harder to get, as you need to go to the bank, most likely your credit history will be checked, and you need to get an approval, while a pre-paid card is more of a no-strings-attached type of card.

This last point is also how it differs from a debit card, the main difference between the two is that the prepaid card is not linked to a bank account like a debit card. Making it a safe option for those who can’t access banking services.

Prepaid card vs Debit card vs Credit card: 

If things are not so clear yet, take a look at this table to see, more clearly, the differences between the three of them.

Prepaid Card Debit Card Credit Card
You spend only the money you have You spend only the money you have You’re borrowing money from a bank
Not connected to a bank account Linked to a bank account Not necessarily linked to a bank account
Does not affect your credit score Does not affect your credit score Affects your credit score
Can be used to pay several goods Can be used to pay several goods Can be used to pay several goods

Advantages and disadvantages of prepaid cards

Even though so far prepaid cards sound like a great option, like anything in life, it has pros and cons that you should take into consideration before deciding on getting one. It’s recommended that you take a look at your needs and your current situation and take into consideration the following list:

Pros of prepaid cards

  • Easy to use for budgeting, even if you have other types of cards.
  • You can be sure that you will never overspend and get into financial trouble.
  • You don’t need to get approval from the bank to issue one.
  • No credit score is required.
  • You can use it to pay at places that don’t accept cash.
  • You don’t have to pay interest.

Cons of prepaid cards

  • You can’t build credit with them. Here’s where it defers from a secured credit card.
  • There are a lot of hidden fees, and they can be high.
  • You have to pay fees for a lot of different actions: card activation, adding money to the card, buying something, check balance, ATM use, etc.
  • Some of them might have spent, reload, or withdraw limits.
  • It is difficult to make disputes of unauthorized transactions.

Keep in mind that there are several types of cards, depending on the issuer, that allow you or don’t allow you to do different things. For example, some cards let you manage them with an app, while others don’t. 

Make sure to do thorough research about which prepaid card will be right for you.

In the Cafe Beautiful Hispanic Woman Makes Takeaway Coffee For a Customer Who Pays by Contactless Mobile Phone to Credit Card System. Concept: what is a prepaid card

How to get a prepaid card

Getting a prepaid card is fairly easy and you can buy one in different places:

  1. Buy a prepaid card online, by phone, at a retailer or from a banking institution.
  2. Register your personal information on your prepaid card. This helps to verify your identity, and in some cases, it can enable you to certain actions like withdrawing money or doing transfers using the app.
  3. Add money to it! You can either transfer money from a bank account or PayPal account, you can get a direct deposit of your paycheck, or reload it in a retail store like Walmart.
  4. Pay your goods anywhere you go, and once the money is gone…
  5. Reload the card!

Sounds easy right? 

Are prepaid cards what you needed?

A prepaid card can be of great help if you don’t want to be carrying cash around with you and you’re not able to get banking services for whatever reason. Unfortunately, a prepaid card won’t help you build credit and recover your credit score. 

While prepaid cards are easy to get, be aware of the high fees you might be paying and analyze if it would be worth it depending on your situation. 

If you’d like more information about credit cards, loans, and growing small businesses, subscribe to Camino Financial Newsletter to get insightful resources about finance, marketing, and business.

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