What is a prepaid card and how does it work?

Prepaid cards can be used similarly to credit and debit cards. But unlike those cards, a prepaid card comes with a preloaded balance that acts as a spending limit. Once you’ve spent the balance, the card can’t be used until you add more money to it.

What you’ll learn:

• There are different types of prepaid cards, including payroll, government benefit and student ID cards.

• Prepaid cards can be used to make purchases as long as they have enough available balance.

• Prepaid card issuers may charge fees for things like card activation, monthly use, inactivity, withdrawing cash and more.

A prepaid card is similar to a gift card: You deposit or load money onto the card. Then, you can use a prepaid card to make purchases or pay bills the same way you would with a credit or debit card. 

You might hear prepaid cards referred to as prepaid debit cards, reloadable cards, prepaid credit cards, pay-as-you-go cards or stored-value cards.

According to the Consumer Financial Protection Bureau (CFPB), prepaid cards can refer to more than just the traditional reloadable cards you buy at a retailer. They could also refer to: 

• Payroll cards: Employers may use payroll cards to pay an employee’s salary or wages as an alternative to direct deposit or paper checks.

• Government benefit cards: Some government agencies use prepaid cards for things like unemployment and Social Security benefits. 

• College ID cards: Some college ID cards also act as prepaid cards. Students may be able to use their IDs to pay for things like food and books on campus or at nearby stores.

You can buy prepaid cards at banks, grocery stores, drugstores and other retailers. Prepaid cards come with either a preset 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.

In some ways, a prepaid card functions like a credit or debit card. You can typically use it for purchases you make online, in person or over the phone. You may even be able to use a prepaid card to withdraw cash at ATMs. But doing so often comes with fees.

When you use a prepaid card, you’re only using the money you’ve loaded onto it. You aren’t borrowing money (like you do with a credit card), and the card doesn’t draw from your bank account (like a debit card does).

That’s why you need to reload an empty card by adding more money if you want to continue using it.

Once you’ve used the balance on a prepaid card, you’ll need to add more money to continue using it. There are several ways to do this:

• Load money directly onto the card from a checking account or another prepaid card.

• Load money onto the card from paychecks or other sources of income.

• Reload the card at a retail location or bank using cash.

• Purchase a reload pack to add a predetermined amount of money to the card.

According to the CFPB, prepaid cards may charge fees for things like: 

• Activating a new card

• Monthly use

• Making certain types of purchases

• Withdrawing cash from an ATM

• Reloading your card with cash

• Checking the balance on your card

• Transferring money between cards 

• Not using your card for a certain amount of time

• Making foreign transactions (foreign transaction fees may apply)

Some prepaid cards offer loss and theft protections. But they may not be as robust as protections for debit and credit cards. For example, Capital One credit cards come with $0 liability for unauthorized charges if your card is lost or stolen. And you can easily lock your card from being used if it’s ever lost, misplaced or stolen. Then, you can unlock it just as easily once you’re ready.

Prepaid card activity isn’t reported to the credit bureaus, so your credit scores won’t be impacted.

If you’re trying to build your credit, you might consider applying for a credit card to use responsibly. If you have trouble qualifying for a traditional credit card, a secured credit card might be a good alternative.

Take a look at these frequently asked questions about prepaid cards to better understand how they work.

Prepaid cards generally allow you to make purchases in the same way as credit and debit cards. The key difference is that prepaid cards aren’t linked to a bank account or line of credit. So, to use one, money has to be loaded onto the card first. There also may be fees to activate and use prepaid cards.

Prepaid cards typically have fewer protections than credit cards. And they don’t offer the same opportunity to build credit. If you’re new to credit or searching for your next credit card, Capital One can help.

• See if you’re pre-approved for credit cards, without harming your credit scores. 

• If you’re looking to build your credit with responsible use, explore cards for people with fair credit. 

• Earn unlimited 1.5% cash back on every purchase, every day with a cash back rewards card. 

• Monitor your credit report and score with CreditWise from Capital One. It’s free for everyone, and using it won’t hurt your credit.