Prepaid Cards vs. Gift Cards: An Overview

Prepaid cards and gift cards are both pieces of plastic that can be used to make purchases. They make popular presents as well: A versatile way to give a recipient the funds to buy whatever they like that seems safer and a touch classier than a wad of cash, and more convenient than a personal check. The biggest difference between the two reflects their permanence: prepaid cards can be reloaded and used indefinitely, while gift cards can generally only be used until the dollar amount on them is exhausted.

Prepaid Cards

Prepaid cards are technically a type of debit card. Issued by a financial institution or credit card company—Visa, MasterCard, and Discover all offer them—they are deposited or "loaded" with a certain amount of money. They then can be used in person or online to purchase items or pay bills. They can also be used at ATMs to withdraw cash.

Just like regular credit cards, prepaid credit cards have a number and an expiration date printed on the front or back, and they generally can be used in the same places. The amount of money deposited or "loaded" onto the card represents the card's credit limit—that is, how much can be charged on it. Once the balance on the card had been exhausted, the card is worthless, unless more funds are deposited on it. In fact, a prepaid debit card can be used repeatedly, so long as the cardholder keeps adding money to the card. It may carry a monthly fee, however.

Although the terms are often used interchangeably, these prepaid cards are not the same as prepaid credit cards. Requiring an application, a credit check, and approval from the issuer, a prepaid credit card functions like a regular credit card: the cardholder can maintain an outstanding balance, receives monthly statements, etc. The key difference is that approval for the card is contingent on a security deposit—collateral for the issuer, in case the cardholder falls delinquent in their payments.

Prepaid cards are technically prepaid debit cards: When used in a transaction, the money on them is subtracted right away, and not put on a balance to be paid later.

Gift Cards

A gift card is also a type of debit card loaded with funds for future discretionary use. Only it contains a specific amount of money. Once this sum is spent down, the card can no longer be used. Gift cards also have expiration dates, which are often much shorter than that of prepaid cards.

Gift cards can be purchased in several different formats. The most familiar type is what's technically known as a closed loop card: It is good only at a particular merchant or certain retailer and bears that outfit's name and logo. Some retail groups will allow the same gift card to be used at any of their affiliated stores.

Gift cards began with specific stores. Now, however, many of the major charge or credit card issuers, like American Express, Visa, Discover, and MasterCard, are also offering gift cards, good anywhere the regular plastic is accepted. Known as open-loop cards, these are most easily confused with prepaid debit cards, especially since some of them are reloadable as well. These cards may carry a one-time activation fee.

Key Takeaways

  • Both prepaid cards and gift cards are loaded with a set amount of money.
  • Prepaid cards, a type of debit card issued by a bank or credit card company, can be used to make purchases, pay bills, or get cash from ATMs.
  • Gift cards are mainly for use at a particular retailer, though some credit card companies issue them too; they traditionally can only be used to buy items.
  • Unlike most gift cards, prepaid cards can be used indefinitely, as long as money is continually added to the card.