A prepaid debit card is much like a gift card in that you are accessing stored value on a card. It is pre-loaded with a certain amount of cash, which can be used the same way that a credit card is used. The payment is immediately deducted from the balance. Once the balance is used up, the card can be reloaded with cash online or through certain convenience stores or other participating physical location depending on the card.

Key Takeaways

  • A prepaid debit card is an alternative to cash, and has a balance that is paid in advance.
  • It can be an alternative to a credit card for consumers with a poor credit history or no credit history.
  • There are many fees associated with using a prepaid debit card. Shop around for the best deal.

This type of card is issued by banks and branded by the major credit card companies, including Visa, MasterCard, Discover, and American Express. No credit check is done before issuing a prepaid debit card.

Understanding Prepaid Debit Cards

A prepaid debit card is, in effect, cash. It is a useful substitute for paper cash in some instances:

  • A consumer with a bad credit rating or a young person with no credit history can use a prepaid debit card to build responsible spending habits over time.
  • It is a safe way to carry money around. Prepaid cards have theft protection, as do credit cards.
  • It can be used for online purchases and routine payments as easily as in a store.
  • It can be gifted as an alternative to cash.

Anyone who wants to stick to a strict budget could consider using a prepaid debit card.

The Downsides of Prepaid Debit Cards

Prepaid credit cards come with a variety of fees that can eat into your cash balance. These often include monthly fees, purchase fees, activation fees, and reloading fees. ATM withdrawal fees and foreign transaction fees are common. Even inactivity fees and declined transaction fees have been known.

In fact, some employers prefer to pay their employees with prepaid debit cards. This may be welcomed by those who don't have checking accounts or who want immediate access to their pay. However, employees have a legal right to decline being paid by debit card because those fees eat into their take-home pay.

Shop for the Best Deal

It's wise to shop around and read the fine print. Prepaid debit cards come in many varieties now, and one might have the best deal for you. For instance, if you have a bank account, you might get a waiver on some fees. If you shop at Kroger, you might consider its card, which has a built-in rewards program.

(You don't want a so-called "closed-loop" prepaid debit card, which is good only for purchases at a single retailer. Those are nice for gift-giving but not for general daily use.)

The Upside of Prepaid Debit Cards

There are fees you won't ever get slapped with when you have a prepaid debit card. First and foremost, there are no interest charges because you're not borrowing money. There are no late fees for the same reason. There's no bill to pay.

If your goal is to repair your credit rating, consider a secured credit card instead of a prepaid debit card.

And, you can't get charged for the equivalent of a bounced check because your purchase will be denied if you have insufficient funds on the card.

Can You Use Prepaid Cards to Pay Bills?

Almost all other transactions can be completed with a prepaid debit card as they would with any other card. Both online purchases and hotel bookings can be made with these cards. In many instances, those accepting payment may even be unaware that a card is prepaid.

An Alternative to a Prepaid Debit Card

If you have a bad credit history or no credit history, you might consider a secured credit card. The application process is easier than for other credit cards because you put down a refundable security deposit that serves as collateral for payment.

If you pay your bills diligently, you'll get the deposit back. If you pay over time, you'll be paying a high interest rate on the balance. But you won't get hit with the many fees associated with prepaid debit cards.