What is a prepaid card and how does it work?

Prepaid cards can be used to make purchases, similar to a debit or credit card. But unlike a bank card, your prepaid card comes with a balance that acts as your spending limit. Once you’ve spent the balance, the card becomes unusable until you add more money to it.

To better understand prepaid cards, read on and learn what they are and how they work.

Key takeaways

  • Prepaid cards are similar to credit cards and traditional debit cards, but they’re not linked to a line of credit or a bank account.
  • Like credit and traditional debit cards, prepaid debit cards can be a simple and safe alternative to carrying cash.
  • Prepaid cards can be used to make purchases as long as you hold a balance.
  • There are often fees associated with prepaid debit cards.

What is a prepaid card?

Let’s start with the basics. You might hear prepaid cards referred to as prepaid debit cards, pay-as-you-go cards or stored-value cards. But the basic principle remains the same: You buy a prepaid card, then use it to pay for purchases.

You can generally buy prepaid cards at banks or retail locations like grocery stores and drugstores. The cards come with either a set available balance or an option to load money onto the card. From there, you can use the card until you’ve depleted the balance. Once the money runs out, you won’t be able to make more purchases until you reload the card.

A prepaid card functions in some ways like other cards. This means you can swipe or insert it into point-of-sale systems to make your purchases and, in some cases, use it at ATMs to withdraw cash.

Prepaid cards vs. credit cards or debit cards

A key factor that differentiates prepaid cards is that they aren’t linked to a bank account like a debit card is, and they aren’t linked to a line of credit like a credit card is.

When you use a prepaid card, you’re only using the money that you’ve loaded onto it. You aren’t borrowing any money, and the card doesn’t draw from any other financial accounts you may have. That’s why you need to reload an empty card with more money if you want to continue using it.

Why use a prepaid card?

There are several situations where a prepaid card could be helpful. Here are some of them:

  • You don’t want to carry cash. A single card can be easier to carry than a wad of bills, and it may also be a safer alternative to cash.
  • You want an extra layer of security. While a stolen prepaid card can be easy to use, a thief will only have access to the balance on the card—unlike a debit card, where they may be able to overdraw an account.
  • You want to limit your spending. A prepaid card can help you not spend more than the balance available on your card.
  • You need a checking account alternative. If you don’t have a checking account but want the convenience of using a card instead of cash, you may opt for a prepaid card.
  • You don’t want to impact your credit score. You don’t need a credit check to purchase a prepaid card, so it could be a helpful short-term credit card alternative.

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