Everything You Need to Know About Prepaid Debit Cards and How They Work

Caz VanDevere
May 1, 2020

Prepaid cards: what are they and should I get one?

Prepaid cards are a type of bank card or reloadable prepaid card that uses pre-loaded cash from your paycheck or another account. There are many different types of prepaid cards available, each with their own features, so you have a lot of choices if you think a prepaid debit card might be a good fit for you. This article breaks down how prepaid cards work, talks about the pros and cons of using them, reviews the most popular cards, and walks through how to use prepaid cards to save money and improve your credit score.

So what exactly is a prepaid card? It’s like a debit card, right? Well, the answer is ‘sorta.’ Prepaid cards are like debit cards and credit cards in that they can be used anywhere other cards can be used: swipe kiosks, chip stations, online shopping, etc. Do you want to buy something, somewhere? A prepaid card does the buying. 

So how are they different from any other card? Debit cards are connected directly to a bank account and transfer money from your account when you buy things, and credit card rack up a balance that you have to pay off later. Unlike these two types of cards, prepaid cards are pre-loaded with money and are not connected with a bank account. The cards are kind of like their own bank account: you add money to the card and the balance goes up; you spend money from the card and the card balance goes down, just like you’d expect.

The pros and cons:

There are pros and cons to using these cards. Let’s start with the positives. First, you can get a prepaid card without having to open a bank account. Unpaid bank fees, a history of overdraft fee infractions, or experiencing fraud might make it hard to open a new account. Banks use a nationwide reporting agency, called ChexSystems, to tell each other about unpaid fees and abandoned accounts, and will block new accounts if you have unresolved issues. If you might have a problem with an old account, you can look at your ChexSystems report here and work with your bank to resolve the issue. Otherwise, a prepaid card is a great option if you’re blocked from opening a traditional bank account.

Another advantage of prepaid cards is that they help with budgeting. Because these cards require funding in advance, you can only spend as much money as you put on the card. Once the card balance hits zero, you can’t buy anything else. It’s also impossible to rack up debt like a credit card, so say goodbye to overdraft fees and interest rates on credit cards! 

So prepaid cards sound pretty good so far, right? They do have their advantages, but they have limitations as well. For example, as discussed above, you can only use a prepaid card if you have money on the card. This is great for avoiding overspending, but sometimes you need the extra money that you can pay back later in a pinch or an emergency. For situations like this, a prepaid card falls short.

Another disadvantage of prepaid cards is that unlike credit cards, they do not help you build credit. Payments on a credit card or a loan like those from Possible finance are reported to the credit bureaus. Successful payments and paid off accounts build your credit score over time. Because prepaid cards don’t use a system of payments, there is nothing to report to the credit bureaus. If building credit is important to you, you may want to look into secured credit cards.

A third disadvantage to prepaid cards is the fees. You probably remember me saying that these cards are good because they avoid fees, right? That’s true, they avoid overdraft fees, but there are other fees associated with this type of card. There are usually fees to put money on the card, for example. Depending on the company that issued your card, there may be an ATM fee to use ATMs, to transfer money, or monthly fees for maintaining the account. These fees are usually less than a $35 overdraft fee, but they can add up and are worth thinking about.

At this point, you may be wondering what happens to the money on your card if your card goes missing or gets stolen. The answer to that question is another negative mark for prepaid cards. Because the card isn’t connected to an account, if you lose the card, you lose the money. There isn’t liability protection for these cards, so keeping your card safe is more important than with debit cards or credit cards.

I’d like to mention one last potential negative of prepaid cards: certain cards, depending on the issuing company, have transfer restrictions. Some cards have limits on how much you can add to the card per day, and how much you can spend per day. More about individual card limits later.

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But what are the fees?

Now that we’ve talked about the pros and cons of these cards, let's look closely at some of the prepaid cards that are available on the market:

Bluebird by American Express 

The Bluebird card advertises itself as the low-fee reloadable prepaid card with no hidden fees. How do these fees stack up? It costs less than $5 for a card, $3.95 to add cash at a retail shop, 1-5% to deposit a check, and a few dollars to withdraw cash or send money, depending on the amount. 

Netspend Visa Card

Netspend offers two Visa prepaid card options: a pay-as-you-go plan, and a monthly plan. The monthly plan costs $9.95 per month with no purchase fee, while the pay-as-you-go plan has no monthly fee, but each purchase has a $1.50 fee. Both plans have a $2.50 ATM withdrawal fee, a $3.95 cash reload fee, and a $5.95 dollar monthly fee if there are no transactions after 90 days.

Bank of America CashPay Card (fee breakdown)

The CashPay Card is another low-cost prepaid card option. The card has a $1.50 monthly fee, one free purchase per month, one free ATM withdrawal per month, and a free direct deposit from your payroll. After your first purchase and your first withdrawal, purchases are $.25 each, and withdrawals are $1.50.

Paypal Prepaid Mastercard (fee breakdown)

Paypal, the largest online financial services company, has its own prepaid card, too. Your first card is free, the plan costs $4.95 per month, ATM withdrawals are $1.95, and cash uploads are $3.95 (direct deposit is free). 

Walmart MoneyCard

The Walmart MoneyCard is a little different than the other cards. It has a monthly fee of $5 bucks, an ATM withdrawal fee of $2.50, a reload fee of $5.95. What sets this card apart is that it earns 2% cashback on Walmart purchases, earns an annual interest of 2%, and you can reload the card for free at Walmart stores. 

Green Dot Prepaid Debit Card

Green Dot also has two card offerings: Load & Go and Unlimited. Load & Go doesn’t have a monthly fee, but charges $1.50 per purchase and costs $1.95 per month if the card is inactive for a year. Unlimited costs $7.95 per month but doesn’t have a fee for inactivity. Both cards charge $5.95 to reload and have an ATM withdrawal fee: Unlimited as $3.00 and Load & Go at $2.50.

To recap, different prepaid cards offer different fee plans. To make a decision, think about whether you’d prefer to have a monthly fee and the ability to buy things with the card for free, or if you’d like to avoid the monthly fee but spend a little bit every time you make a purchase. Also keep in mind things beyond the transaction fee. For example, do you have a Paypal account, or do you find yourself shopping at Walmart frequently?

What else ya got?

If none of the above sounds appealing to you, there are other financial options that might be a better fit for your needs. New online banks, sometimes called challenger banks, offer accounts that are easily open and cheap to maintain. Let’s walk through some of these options below.

Paypal

Paypal is an old-school financial website that offers online payments and banking services. You can send and receive money, open an account, pay for stuff, even get a debit card. Paypal accounts are free, and sending money to and from your account is usually free too, depending on what type of account is on the other end of the transfer. 

Chime

Chime is a newer form of online banking and it’s a great choice if you want to dip your checking account balance below zero without any fees. You can overdraft your account, withdraw from ATMs for free, and transfer money to other accounts for free. Chime has a debit card as well.

Varo

Varo, similar to Chime, is an online bank that offers cheap financial services and a debit. ATM withdrawals are $2.50, but forget about monthly fees, transfer fees, and overdraft fees. Varo even has a high-yield savings account option if you’re trying to get a return on your money in the bank!

Simple

Simple is the last alternative to prepaid cards we’ll talk about. How does Simple make money? Who knows. They don’t charge ATM fees, insufficient funds fees, stop payment fees or dormant account fees. It’s zeros all the way down the page. Seriously, take a look. Simple offers a debit card too.

Final verdict:

To recap, prepaid cards are pre-loaded payment cards that can be used like a debit card or credit card. The cards have their own advantages and disadvantages, in that they are easy to get and can help with budgeting, but they usually come with fees and you have to be careful not to lose your card. There is a selection of prepaid cards available on the market, as well as a handful of alternatives if you’re looking for something a little different. As always, if you need some quick cash and a way to build your credit score, looking into a loan from Possible.

Caz VanDevere

Caz is a Product Analyst at Possible who discovered his love for writing in a high school science fiction class. Though he still enjoys writing stories about alien cultures, his interests now include finding solutions to product problems and writing helpful content for Possible’s customers.

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