How Do Prepaid Debit Cards Work?

A prepaid debit card is much like a gift card: It allows you to spend whatever amount of money is stored on the card. Once the balance is used up, you can reload the card online or at an ATM, a participating store, or other physical location. Prepaid debit cards are issued by banks and branded by the major credit card companies, including Visa, MasterCard, Discover, and American Express.

Key Takeaways

  • A prepaid debit card can be a useful alternative to cash.
  • Prepaid debit cards are an option for people who don't have a credit card or access to a regular debit card connected to a bank account.
  • There are many fees associated with prepaid debit cards, so it's important to shop around for the best deal.

Understanding Prepaid Debit Cards

A prepaid debit card is as good as cash—and sometimes better:

  • It is a safe way to carry money around—unlike, say, a wad of paper money. Prepaid cards also come with certain consumer protections, while cash does not.
  • A prepaid debit card can be used for online purchases.
  • It can make a more attractive gift than cash.

Anyone who wants to stick to a strict budget, or who has had trouble managing credit cards, could also consider using a prepaid debit card.

You can use a prepaid debit card for any transaction that you might otherwise use a credit card or regular debit card for. In many instances, the recipient of your payment may even be unaware that the card is prepaid.

Some employers pay their workers with prepaid debit cards called payroll cards (which can be useful if the person doesn't have a bank account or direct deposit). Many government benefits are also available via prepaid debit cards, including Social Security.

Prepaid Debit Cards vs. Regular Debit Cards

With a regular debit card, the amount of money you can spend is tied to how much you have in the checking account it is linked to. So you need to have a bank account to use a regular debit card, while you don't with a prepaid debit card. With a regular debit card, the amount of money you have available to you will also fluctuate from day to day, as money moves in and out of your checking account. With a prepaid debit card, you have a fixed amount of money to spend, which declines as you spend it and rises only if you reload the card.

The Downsides of Prepaid Debit Cards

Prepaid debit cards can come with an assortment of fees that will eat into your cash balance. These may include monthly fees, transaction fees, ATM fees, reloading fees, foreign transaction fees, and more. You may even be charged a fee for checking your balance in the card.

Employees have a legal right to decline being paid through a payroll card because the fees will reduce their take-home pay.

Shopping for a Prepaid Debit Card

If you're shopping for a prepaid debt card, pay particular attention to its fees. Also consider convenience. For example, if the card is free to use at an ATM (as many of the best cards are), how large an ATM network will you have access to, and is there one close to where you live or work?


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

An Alternative to a Prepaid Debit Card

If the reason you want a prepaid debit card is that you have a bad credit history or no credit history and are unable to get a conventional credit card, you might consider a secured credit card instead. Secured cards are easier to qualify for because they require you to put down a refundable security deposit that serves as collateral for the lender.

The advantage of a secured credit card is that your monthly payments can be reported to the three major credit bureaus and help build your credit history. Debit cards, either prepaid or the regular kind, don't report transactions to the credit bureaus and will do nothing to improve your credit.

Article Sources
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  1. Consumer Financial Protection Bureau (CFPB). "Know Your Rights."

  2. Consumer Financial Protection Bureau (CFPB). "What Types of Fees Do Prepaid Cards Typically Charge?"

  3. Consumer Financial Protection Bureau. "What Is a Payroll Card?"