How to use a prepaid debit card—the tool that lets you leave your cash at home

Without a credit card or debit card, trying to make purchases online or perform many other financial tasks can be an inconvenience. Therefore, if you have bad credit or you prefer to avoid traditional plastic payment methods, you might consider using prepaid debit cards as a cash alternative. 

Around six million Americans—4.5% of U.S households—are “unbanked” with no access to a checking or savings account according to the most recent data available from the Federal Deposit Insurance Corporation (FDIC). Meanwhile, 18% of adults in the United States do not have an open credit card account according to the U.S. Government Accountability Office. 

As you can see, if you don’t have access to traditional credit cards or debit cards, you’re not alone. Yet before you use a prepaid debit card as an alternative (or in addition) to these types of cards, it’s wise to understand how prepaid cards work along with their limitations. 

What is a prepaid debit card? 

A prepaid debit card is a type of plastic payment method you can use to make purchases. The card works like a gift card in the sense that you must preload it with money before you can use it. 

Many prepaid debit cards come with the backing of major credit card networks like American Express, Visa, or Mastercard. Such cards may feature Amex, Visa, or Mastercard logos. You can typically use the cards with any retailer that accepts credit cards from those networks or standard debit cards.

How do you use a prepaid debit card? 

Prepaid debit cards look similar to credit cards and debit cards on the outside. Yet prepaid cards do not operate the same as other traditional payment methods. 

To begin, when you purchase a prepaid debit card you do not need to complete a credit application. No credit card issuer will check your credit report or credit score when you open an account. There will be no hard credit inquiry that has the potential to damage your credit score. And unlike a credit card, you don’t have to worry about needing a good credit score to qualify for a new account. 

When you open a prepaid debit card, the account does not come with a credit limit for you to borrow against. It’s impossible to create credit card debt using this type of card. And since you’re not borrowing money or revolving a balance from one month to the next, you also won’t incur any interest charges when you use a prepaid card. 

Instead, with a prepaid debit card you pre-load a certain amount of money onto the account. This amount represents the maximum amount you can spend on the card before you’ll need to reload additional funds. 

Keep in mind that most prepaid cards usually feature fees you must pay when you use the account. Some prepaid cards may be more expensive to use than others. Below are some of the common prepaid card fees you may encounter. 

• Activation fees
• Monthly fees
• Transaction fees
• ATM fees
• Balance inquiry fees
• Cash reloading fees
• Paper statement fees
• Decline fees
• Inactivity fees
• Transfer fees (card-to-card)
• Bill pay fees
• Card replacement fees
• Foreign transaction fees

It’s also worth noting that most prepaid debit cards do not offer rewards. Those that do often feature more modest rewards than you can find in the credit card space where points, miles, and cash back offers are common for consumers with good credit. 

How prepaid debit cards impact your credit

Prepaid debit cards can serve as a convenient way to pay for transactions—both online and in person at brick-and-mortar retail stores. However, these types of cards do not offer the potential to build credit history or a credit score in the same way a traditional credit card does. 

When you open a prepaid debit card, the provider does not report the account to any of the major credit bureaus (Equifax, TransUnion, or Experian). Since a prepaid card will not show up on your credit reports, it can’t impact your credit score—for the positive or negative.

Where to buy prepaid debit cards

There are several ways to purchase prepaid debit cards. You can buy the cards in person at many retail stores, including grocery stores, big box stores, drug stores, and gas stations.

As with credit cards, you can also compare the best prepaid debit card offers online. By evaluating the top prepaid debit card offers side by side, you may be better able to note which accounts have features that are best suited to your specific financial needs. 

No matter what type of financial product you’re considering, it’s wise to shop around. Comparing multiple options can help you make sure you find the best deal available for your situation. 

Choosing a prepaid debit card

It can be easy to get overwhelmed when you’re comparing multiple prepaid credit card options. However, if you focus on the features that different prepaid cards offer it should be easier to make a list of your top choices. 

Below are the details to look for when choosing a prepaid debit card. 

• Fees: Make a list of any fees the card provider charges. Prepaid cards with lower fees are more attractive than those that are more expensive to use. 
• Convenient reloading options: If you plan to use your prepaid debit card on a regular basis, look for a card that’s easy to reload. Some cards may allow you to add cash to your account via direct deposit, bank account transfer, cash deposit at participating retail locations, or mobile check deposit. 
• Consumer protections: Many prepaid cards offer consumer protections in the event of theft or fraud. However, you should review the fee disclosure for details that indicate your funds are eligible for FDIC insurance. It’s also essential to register any prepaid card you open properly and report loss or fraud promptly to make sure these protections apply to your account.
• ATM benefits: Some prepaid cards may offer free ATM access at certain networks. If you think you’ll need access to cash from your card on even an occasional basis, this perk could be important. Some will even let you withdraw cash overseas, making them an invaluable tool for an unbanked person who travels. 

Prepaid debit card alternatives

A prepaid debit card could be a more convenient payment option than cash in many situations. But if you’re using a prepaid card because you think bad credit will prevent you from qualifying for any other type of credit, there may be other options available of which you’re unaware. 

Below are two prepaid debit card alternatives to consider, even if you have bad credit or no credit.

• Secured credit cards: A secured credit card is a type of account you open by making a cash security deposit with the issuing bank. The security deposit serves as collateral for the account, reducing the card issuer’s risk. If you manage the account responsibly, it could help you build credit. Some accounts even feature modest rewards on everyday spending as an added perk. We’ve ranked the best secured cards if this option appeals to you. 
• Subprime credit cards: Some credit card companies offer unsecured credit cards for bad credit. These subprime credit cards typically feature lower credit limits and sometimes higher interest rates and annual fees as well. However, if you can qualify for an account and use it in a responsible way, it also has the potential to help you build or rebuild credit over time. On the other hand, late payments or a higher credit utilization ratio on any credit card could hurt your credit score instead. 

The takeaway

A prepaid debit card isn’t the perfect fit for everyone. Before you use one of these products as a regular payment method, it’s wise to consider alternative options (aka traditional credit cards) with credit-building potential and better consumer protections. 

If you decide to open a prepaid debit card, it makes sense to shop around and compare your options. Looking for a card with the lowest fees and best features might save you money and protect any cash you load onto the account.

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