How to Use a Prepaid Debit Card: The Tool That Lets You Leave Your Cash at Home

Without a credit or debit card, trying to make online purchases or perform many other financial tasks can be an inconvenience. So, if you have bad credit or prefer to avoid traditional plastic payment methods, you may want to consider using prepaid debit cards as an alternative to cash.

According to the most recent data available from the Federal Deposit Insurance Corporation (FDIC), approximately six million Americans – 4.5% of US households – are “without access to a bank account” and without access to a checking or savings account. Meanwhile, 18% of adults in the United States do not have an open credit card account, according to the U.S. Government Accountability Office.

As you can see, if you don’t have access to traditional credit or debit cards, you’re not alone. However, before using a prepaid debit card as an alternative (or in addition) to these types of cards, it is advisable to understand how prepaid cards work and their limits.

What is a prepaid debit card?

A prepaid debit card is a type of plastic payment method that you can use to make purchases. The card works like a gift card, meaning you have to pre-load it with money before you can use it.

Many prepaid debit cards are supported by major credit card networks such as American Express, Visa, or Mastercard. These cards may feature the Amex, Visa, or Mastercard logos. You can typically use cards with any retailer that accepts credit cards from those networks or standard debit cards.

How do I use a prepaid debit card?

Prepaid debit cards look similar to credit cards and debit cards on the outside. However, prepaid cards do not work in the same way as other traditional payment methods.

For starters, when you purchase a prepaid debit card you don’t need to complete a credit application. No credit card issuer will check your credit report or credit score when you open an account. There will be no hard credit inquiry that can potentially damage your credit score. And unlike a credit card, you don’t have to worry about needing a good credit score to qualify for a new account.

When you open a prepaid debit card, the account doesn’t have a credit limit you can borrow against. It is impossible to create credit card debt using this type of card. And because you’re not borrowing money or rolling a balance from one month to the next, you won’t incur any interest charges when you use a prepaid card.

With a prepaid debit card, however, you preload a certain amount of money into your account. This amount is the maximum amount you can spend on the card before having to top up additional funds.

Keep in mind that most prepaid cards usually have fees to pay when you use the account. Some prepaid cards may be more expensive to use than others. Below are some of the most common prepaid card fees you may encounter.

• Activation fees
• Monthly fees
• Transaction Fees
• ATM fees
• Balance inquiry fees
• Cash top-up fees
• Paper statement charges
• Refuse commissions
• Inactivity fees
• Transfer fees (card to card)
• Rates for paying invoices
• Card replacement costs
• Foreign Transaction Fees

It’s also worth noting that most prepaid debit cards don’t offer rewards. Those that do often offer more modest rewards than you can find in the credit card space where points, miles and cash back offers are common for consumers with good credit.

How Prepaid Debit Cards Affect Your Credit

Prepaid debit cards can be a convenient way to pay for transactions, both online and in person at brick-and-mortar retail stores. However, these types of cards do not offer the potential to build a credit history or credit score in the same way as a traditional credit card.

When you open a prepaid debit card, the provider does not report the account to any of the major credit bureaus (Equifax, TransUnion, or Experian). Since a prepaid card won’t show up on your credit reports, it can’t affect your credit score, positively or negatively.

Where to buy prepaid debit cards

There are several ways to purchase prepaid debit cards. You can purchase cards in person at many retail stores, including grocery stores, department stores, pharmacies, and gas stations.

As with credit cards, you can also compare the best prepaid debit card offers online. By evaluating the best prepaid debit card offers side by side, you may be able to better notice which accounts have features best suited to your specific financial needs.

No matter what type of financial product you’re considering, it’s wise to shop around. Comparing multiple options can help you ensure you find the best deal available for your situation.

Choose a prepaid debit card

It can be easy to feel overwhelmed when comparing multiple prepaid credit card options. However, if you focus on the features offered by different prepaid cards, it should be easier to make a list of your top choices.

Below are details to pay attention to when choosing a prepaid debit card.

• Commissions: Make a list of all the fees charged by your card provider. Prepaid cards with lower fees are more attractive than more expensive ones to use.
• Convenient charging options: If you plan to use your prepaid debit card regularly, look for a card that’s easy to reload. Some cards may allow you to add cash to your account via direct deposit, bank account transfer, cash deposit at participating locations, or mobile check deposit.
• Consumer protection: Many prepaid cards offer consumer protection in the event of theft or fraud. However, you should review the fee disclosure for details indicating that your funds are eligible for FDIC insurance. It is also essential to properly register any open prepaid cards and promptly report losses or fraud to ensure these protections apply to your account.
• Advantages of the ATM: Some prepaid cards may offer free ATM access to certain networks. If you find you need access to cash from your card even occasionally, this benefit could be important. Some will even allow you to withdraw cash abroad, making them an invaluable tool for a person without a bank account who is traveling.

Alternatives to prepaid debit cards

In many situations, a prepaid debit card may be a more convenient payment option than cash. But if you’re using a prepaid card because you think bad credit will prevent you from qualifying for any other type of credit, there may be other options available that you’re not aware of.

Below are two prepaid debit card alternatives to consider, even if you have bad credit or no credit.

• Secured credit cards: A secured credit card is a type of account that is opened by making a cash security deposit with the issuing bank. The security deposit acts as collateral for the account and reduces the card issuer’s risk. If you manage your account responsibly, it could help you build credit. Some accounts also come with modest rewards on everyday spending as an added benefit. We’ve ranked the best secured cards if you like this option.
• Subprime credit cards: Some credit card companies offer unsecured credit cards for bad credit. These subprime credit cards typically have lower credit limits and sometimes higher interest rates and annual fees as well. However, if you can qualify for an account and use it responsibly, it also has the potential to help you build or rebuild credit over time. On the other hand, late payments or a higher credit utilization ratio on any credit card could instead hurt your credit score.

The takeaway

A prepaid debit card isn’t the perfect solution for everyone. Before using one of these products as a regular payment method, it is advisable to consider alternative options (i.e. traditional credit cards) with credit-building potential and better consumer protection.

If you decide to open a prepaid debit card, it’s a good idea to shop around and compare your options. Looking for a card with the lowest fees and best features could save you money and protect the money you load into your account.

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