Prepaid cards and debit cards have some important similarities and differences. You can get these cards even if you have a bad credit history. You must have a bank account to have a debit card because it is linked directly to the account. A prepaid card simply requires money to purchase or reload the card. Neither affects your credit score, but both give you a convenient way to buy things without having cash on hand.
Function of Prepaid Cards and Debit Cards
Prepaid cards and debit cards come with a Visa or MasterCard logo. Prepaid cards can also be linked to a specific brand for stores, gas stations, restaurants or other businesses. You can use the cards wherever Visa or MasterCard are accepted, just like a credit card.
Prepaid cards and debit cards have a similar function. They both let you spend money directly instead of borrowing funds as you do with a credit card.
Cards that are branded as Visa or MasterCard can be used to pay for purchases at stores, with online retailers and with just about any other merchant that accepts those credit cards. Prepaid cards that are linked to a specific retailer, restaurant or other business can only be spent at that business or possibly its affiliates; these are more in the nature of a gift card.
Funding of Prepaid Cards
But you can buy certain types of prepaid merchant cards and gift cards with your credit card. For example, most restaurants and retailers will let you pay for prepaid gift cards with a credit card. You can buy prepaid cards at certain convenience stores and pharmacies; some can be reloaded with more money, while others cannot.
Funding of Debit Cards
Debit cards are funded by the bank account to which they are attached. When you open a checking account, you'll get a debit card with a Visa or MasterCard logo that you can use to withdraw money from the bank account or spend the money with merchants in the same way you would use a credit card, except that you can only spend what you have to avoid overdrawing your account.
Cost of these Cards
Debit cards are usually free, although some banks impose service fees. In most cases, you will only have to pay if you overdraw your bank account and don't have overdraft protection.
Prepaid cards branded as Visa or MasterCard usually have a monthly fee to keep the card active. You must have enough money loaded on the card each month to cover the fee. If you purchase a prepaid card with a set amount, you'll have to pay an initial fee with the purchase.
Prepaid and Debit Card Limitations
Prepaid credit cards and debit cards both have limitations. A prepaid card is limited to the amount of funds you previously loaded onto the card. Purchases will be declined once that limit is reached. Prepaid cards linked to a specific merchant may have an expiration date. You will lose the money if it is not spent before it expires.
Most of the time, a debit card is limited to the amount of money you have in the linked bank account. If you try to spend more than what you have in your bank account, the transaction will be declined unless you've opted into overdraft protection, which means the bank will put the transaction through, but your account balance will drop below zero, and you'll be assessed an overdraft fee. You'll owe the bank the fees as well as the negative balance amount.
Prepaid and Debit Card Reuse
Debit cards can be used for as long as you maintain your bank account. They usually have an expiration date, but your bank will issue a new card when the old one expires. Most prepaid cards can be reloaded after you spend the initial balance. You can keep reusing them as long as you keep adding more money.
- Consumer Financial Protection Bureau: What Is an Overdraft?
- Consumer Financial Protection Bureau: What is the Difference Between a Prepaid Card, a Debit Card, and a Credit Card?
- Consumer Financial Protection Bureau: Understanding the Overdraft “Opt-in” Choice
- Federal Trade Commission. "Prepaid Cards." Accessed Oct. 9, 2020.
- Federal Trade Commission. "Lost or Stolen Credit, ATM, and Debit Cards." Accessed Oct. 9, 2020.
- Experian. "Do Prepaid Cards Help Credit Scores?" Accessed Oct. 9, 2020.
Based in Kissimmee, Fla., Barb Nefer is a freelance writer with over 20 years of experience. She is a mental health counselor, finance coach and travel agency owner. Her work has appeared in such magazines as "The Writer" and "Grit" and she authored the book, "So You Want to Be a Counselor."