A prepaid card lets you load a cash balance ahead of time and use it anywhere your card network—Mastercard, Visa, Discover, or American Express—is accepted. In that sense, it’s very much like a debit card, but without the bank account attached.
Why would you need one? Traditional credit and debit cards carry certain risks that some consumers would rather avoid. And those with lower credit ratings may be subject to particularly onerous interest rates, making the risks and cost of carrying a balance higher than average. Meantime, cash-free transactions are ever more ubiquitous—which makes it easier to pay bills, book a hotel room, or put gas in your car, but harder to avoid carrying some kind of card.
For millions of Americans, the solution is a reloadable prepaid card. And thanks to a new rule from the Consumer Financial Protection Bureau (CFPB) that went into effect April 1, 2019, there are important new protections for consumers who use them.
An Overview of Prepaid Cards
With a prepaid card, you load a balance ahead of time and use it anywhere your card network—Mastercard, Visa, Discover, or American Express—is accepted. In that sense, it’s very much like a debit card, but without the bank account attached.
That has appeal for a lot of consumers. You get the convenience of an electronic transaction without having to worry about overdraft fees. Nor will you incur the steep interest rates that a credit card would charge. (Some people call these cards "prepaid credit cards," but that's a misnomer—there's no credit involved.)
Among certain consumer groups, particularly “unbanked” adults without a traditional bank account, prepaid cards have become a popular way to make cashless transactions. According to a 2017 FDIC survey, more than 9% of American households are using prepaid cards for financial transactions.
Even so, prepaid cards charge certain fees that traditional bank accounts don’t, so you’ll want to make sure the benefits outweigh the risks before signing up for one. But the CFPB rule should also make it easier to choose a card with the lowest fees.
How Prepaid Cards Work
Prepaid cards feature many of the same benefits you’d get with a checking account. You can use them to make in-store and online purchases, pay bills, withdraw money from an ATM, even deposit checks into your prepaid card account. And many of these cards, such as Green Dot and the Walmart MoneyCard, offer apps that let you keep track of your balance, review transactions, and transfer funds.
- Prepaid cards are a form of debit card where you spend money you’ve already loaded onto the card.
- While prepaid cards are catching on among “unbanked” consumers, some individuals use them in tandem with a checking account to limit their discretionary spending.
- Issuers may charge setup, reloading, and purchase fees—in addition to a fixed monthly fee. It’s a good idea to understand exactly what those charges are before buying a card.
Some issuers even provide rewards programs, much like credit cards. The American Express Serve card, for example, offers unlimited 1% cash back on all your purchases. And the Walmart MoneyCard lets you earn as much as 3% cash back when you use it at Walmart.com, or 1% cash back for purchases at Walmart stores.
Peace of mind
Adding to their appeal is the peace of mind they provide users. As of April 1, 2019, cards marketed as "prepaid" are covered by the Electronic Funds Transfer Act; that means companies have to investigate and reimburse you for unauthorized charges or errors as long as you file a timely report. You may also be eligible for certain additional protections offered by the card’s network. However, in order to get those benefits, you have to register the card with the issuer.
Most cards are also FDIC-insured, protecting balances up to $250,000 from a bank failure (again, you need to register your card to obtain coverage). The CFPB has also ruled that issuers have to provide a warning if they don't offer this insurance.
Also check that the card you choose is equipped with an EMV chip to limit the chances of identity theft.
No credit required—but no credit-building
Customers can purchase a card at many supermarkets and convenience stores, as well as directly through a bank or card issuer. Since you’re only spending the money you deposit, there’s no credit check required to get one. While a spotty borrowing history doesn’t hinder your chances of obtaining a prepaid card, having one also doesn't help you improve your credit score.
When your balance drops, prepaid card users have several options for reloading funds. Depending on the card, you may be able to:
- Transfer money from a bank or PayPal account.
- Deposit funds at a bank or at participating retailers.
- Add funds by purchasing a “reload pack."
- Set up a direct deposit for your paycheck (cards come with account and routing numbers, which make this possible).
Reasons to Get a Prepaid Card
While they work in many ways like a typical debit or credit card, prepaid versions offer certain advantages over these other forms of payment.
Prepaid cards can be a great way to stay out of debt, since you can’t spend more than the amount you already deposited. It’s also a nifty budgeting tool. Even if you have a checking account, you can put a fixed amount on your prepaid card for certain spending categories, such as eating out. When your allowance for the month dwindles, you’re forced to do a little belt-tightening.
Avoid overdraft fees
Banks have no problem with slapping customers with steep penalties when they overdraw their checking account. Last year, the average overdraft fee nationwide was $30 per transaction, according to the research firm Moebs Services. Some banks let you turn off overdraft protection, but it may be easier still to get one of the many prepaid cards that never charge these fees.
You can’t lose more than the balance on your prepaid card, even if you become the victim of fraudsters. If you use a debit card instead, its liability protection likely has you covered, but some consumers prefer using their prepaid card when making an online or in-store transaction, rather than putting their full checking account at risk.
Much like a traditional debit card, you can use prepaid cards to make purchases, pay bills online, withdraw money, or deposit checks.
Overcome a poor banking history
Did you leave your last bank with unpaid fees? If so, it could come back to haunt you when you try to open a checking account at another institution. Banks order a bank history report before letting you open an account, which will show any previous accounts that have been “closed for cause.” Prepaid cards require no such checks, so it’s a way to go cashless, even if other avenues are closed to you.
Teach kids how to manage money
Prepaid cards are a convenient way to teach kids about managing money and navigating an increasingly cash-free economy. FamZoo is among the products aimed at this market (and it gets rave reviews online). Families can easily transfer money between cards, making it a breeze to pay kids an allowance or reimburse them for chores. And with the accompanying app, parents can see exactly how their kids are using those funds. There’s a monthly subscription fee of $5.99 per family, although prepaid plans significantly reduce that cost.
Beware of Hefty Fees
Though they offer some compelling benefits to unbanked and budget-conscious consumers, prepaid cards have a big Achilles heel: fees. While the individual charges are modest, they’re seemingly everywhere.
Depending on the card you choose, you may face an activation fee, monthly fees, transaction fees, and reloading fees. Some even assess inactivity fees if you don’t use your card for an extended period of time.
Needless to say, fees can add up quickly. Take the Green Dot debit card. While it’s become a popular choice for its generous 5% cash back reward, the card charges up to $1.95 for in-store purchases, $4.95 for reloading your balance at a register, and $3.00 for ATM withdrawals—on top of its $9.95 monthly service fee.
Some products, such as the Brinks Money card, reduce your monthly service charge when you set up a monthly direct deposit. Even so, prepaid cards can be a costly alternative to regular bank accounts.
You’ll want to do some digging and read the disclosures to figure out what the fee schedule looks like before pulling a card off the store shelf. The CFPB rule aims to make that process simpler for users. Now, issuers have to provide a short fee chart on the outside of the card packaging, as well as a more detailed chart on the inside. They also must post fee information online on the company website. One other piece of good news: Basic account information must be provided free, including account balances by phone and transaction information online and by mail on request.
The Bottom Line
If you’re looking to control your spending and stay out of credit card debt, prepaid cards might just be the answer. There are myriad options on the market, so look for ones that are easy to use and reload without paying a fortune in fees.