A prepaid debit card is a reloadable payment card that can be used to shop online or at a store, transfer money, pay bills and withdraw cash from ATMs. These cards can be used anywhere Visa, MasterCard or American Express are accepted. They are funded in advance by cash, check, direct deposits or transfers from another account. Unlike regular debit cards, they don’t require a bank account or minimum balance.
- How Prepaid Debit Cards Work
- Pros and Cons of Prepaid Cards
- Who Should Get a Prepaid Debit Card
- Prepaid Cards Vs. Other Payment Cards
- Upcoming Changes to Prepaid Card Rules
How Prepaid Debit Cards Work
Buying a Prepaid Card: Prepaid debit cards can be purchased at banks, online from credit card companies, or at certain retail locations such as Walmart and Walgreens. You don’t need to open a bank account to get a card. But you will be asked to provide your name, address, birthdate and Social Security number to open a prepaid debit card account. You may need to provide further proof of identification such as a driver’s license during the process. Some issuers also may have age restrictions. Many issuers also allow you to request additional cards—sometimes with set spending limits—for family members who may not have to meet certain age restrictions.
Getting Your Card: If you registered for your card online, the issuer may give you a temporary card number to use for purchases online or over the phone while you wait for your permanent card. A temporary card is often included when you purchase a prepaid card at a store or bank branch. Whether you buy online or in a store, your permanent prepaid card—with your name on it—is typically mailed to you within two weeks of the purchase. Loading Funds: You can add funds to the card when you open your account. Typically, there is a minimum amount required for the initial load. After that, there are several ways to reload your card with more money depending on the issuer. Each method may come with certain fees, amount limits and time limits before funds are available. Some issuers also offer pre-authorized, automatic reloads from other bank accounts. The most common reload options are listed below. Check your card agreement or your issuer’s website for details for each type of deposit.
Ways to Reload a Prepaid Debit Card
- Direct deposit of your paycheck, government benefits check or tax refund
- ATM deposits of cash or checks
- In-person deposit of cash or check at a bank branch, store or other location
- Transfer of funds from a checking or savings account
- Remote camera deposit of checks via mobile app
Using Your Prepaid Card: Once loaded, your prepaid debit card can be used anywhere that accepts the logo on your card—Visa, MasterCard or American Express. The card can be used to make online or in-store purchases and to pay bills. Issuer often allow “split tender transactions,” where you can pay part of purchase with your card and the remaining portion using another method. You can also withdraw money at ATMs, but there may be withdrawal fees depending on whether your card is tied to an ATM network. To help manage your card account, many issuers offer balance checks and transaction history online, on their mobile apps, or via text messages.
Pros and Cons of Prepaid Cards
Prepaid cards are easy to get and maintain, but there are drawbacks to consider. Below is a summary of the advantages and disadvantages of prepaid debit cards:
|No credit check required||Fees|
|No bank account required||Cash deposit limit|
|No minimum balance||Doesn't build credit|
|No overdrafts (mostly)||Many don't accept wire transfers|
|FDIC-insured||Can't be used for car, furniture or equipment rentals|
Some offer check-writing, cash back, roadside and travel assistance and purchase protection
|Fraud/liability protection lacking until new rules in 2018|
The biggest drawback to prepaid debit cards are the numerous fees, which can add up if you’re not careful with how you use the card. Some issuers will waive some fees for meeting certain conditions, such as setting up an automatic direct deposit to your card, keeping a minimum balance, or linking a bank account to your card. Check your card’s agreement for more details. It’s also smart to compare prepaid debit cards and their fees and determine which card is best for you and your financial habits.
|Common Fees Charged by Prepaid Debit Cards|
|Fee to open the card||Cash reload fee|
Monthly service fee
|Check deposit fee|
Point-of-sale transaction fee
|Online bill pay fee|
Cash withdrawal at ATM fee
|Cash withdrawal at branch fee||Cashier's check|
|Balance-inquiry fee||Declined ATM transaction fee|
|Paper statement fee||Declined point-of-sale transaction fee|
|Direct deposit fee||Foreign transaction fee|
|Transfer fee||Close account fee|
Who Should Get A Prepaid Debit Card
Prepaid cards are a good option for people who have a difficult time maintaining a traditional checking account or those who prefer an alternative to a bank. About one in 10 U.S. households use a prepaid debit card, with half of those households considered to be either unbanked or underbanked—the latter being defined as having one account at a financial institution but also using alternative financial products. People often prefer prepaid cards over traditional checking accounts because of high and unpredictable bank fees, minimum balance requirements and distrust of banks.
Also, parents may consider a prepaid card for their teenage or college-age children to teach them budgeting and money management without worrying about overcharging a credit card or incurring overdraft fees or minimum balance fees charged by many checking accounts. If a child is under 18, parents can open the prepaid card account themselves and get a secondary card—often with spending limits—for the child. Children over 18 can open a prepaid card account themselves, and parents can set up automatic transfers to the card from their bank account.
Prepaid Cards Vs. Other Payment Cards
Prepaid Cards vs. Debit Cards: Despite the name, prepaid debit cards differ in significant ways from regular debit cards. Debit cards must be linked to a checking account, and funds from that account pay for purchases or ATM withdrawals. You can also overdraft on debit cards, which triggers a fee, if you spend more than your checking account balance. Right now, debit cards come with more federal protections from liability and fraud, but that’s set to change in April 2018, when prepaid cards will get new protections (see below). But prepaid cards and debit cards are similar, too. Both cap daily ATM withdrawals and impose a daily purchase limit.
Prepaid Cards vs. Credit Cards: There also are plenty of big differences between credit cards and prepaid cards. You must have a high-enough credit score to qualify for a credit card. With prepaid cards, there are no credit checks. Credit cards also help to build credit history, while prepaid cards don’t. When using a credit card, you borrow to pay for transactions and must pay the money back to the card issuer, either in full or smaller payments over time. Prepaid cards are pre-funded and transactions are paid with money existing in the account. Credit cards are riskier because you’re borrowing money, but many come with perks and rewards. They are also strictly regulated by the Credit CARD Act of 2009.
Prepaid Cards vs. Gift Cards: Prepaid debit cards also differ from gift cards that have the Visa, MasterCard or American Express logo. These gift cards have a pre-set amount of money and can’t be reloaded with funds. Unlike prepaid cards, gift cards can’t be used at ATMs or used to pay recurring bills or monthly subscriptions. These cards are meant as gifts for persons of any age who can spend the money on the card at any store. They can be purchased at retailers like drug stores, discount big box stores or supermarkets. These prepaid gift cards are also subject to protections and rules laid out by the Credit CARD Act of 2009.
Upcoming Changes to Prepaid Card Rules
The Consumer Financial Protection Bureau issued new federal rules for prepaid debit cards, effective April 2018, to better protect consumers. The rules cover traditional prepaid cards discussed above along with mobile wallets, person-to-person payment products, payroll cards, tax refund cards, student financial aid disbursement cards and prepaid cards used to distribute government benefits.
Consumer Protections: Prepaid cards will receive protections under the Electronic Fund Transfer Act. Financial institutions must offer prepaid card users free access to their account balances, transaction history, and fees they’ve been charged by telephone, online or in writing, if requested. Issuers also must help consumers investigate and resolve any unauthorized or phony charges or other errors on their accounts within a reasonable amount of time. The law also stipulates that the consumer is liable for $50 at most for a lost, stolen or wrongly charged card, if reported promptly.
Disclosures: Starting April 2018, the CFPB will require prepaid card issuers to provide two forms—one short and one long—with easy-to-read disclosures. The short form will include important account information, including fees, that’s important to consumers shopping for a prepaid card. The long disclosure form will contain a full list of fees and other key information about the card. Prepaid card agreements also will be posted on issuer websites for easy comparison shopping.
Overdrafts: Last, the new rules stipulate how an issuer can offer overdraft protection on prepaid cards. Many cards don’t offer this feature now. The prepaid card issuer must make sure that the consumer has the ability to pay back the overdraft amount, and is given a reasonable time for repayment. Consumers must be given regular billing statements related to their overdraft debt, and funds for credit repayment must remain separate from funds to reload the card. Fees and interest charges also are limited under the new rule.