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 load more money onto 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 if the cards 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 load money onto the card. Then, you can use your 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.

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 you’re not using funds from your bank account like you do with a debit card. That’s why you need to reload an empty prepaid card by adding more money if you want to continue using it. 

Here are a few additional ways prepaid cards differ from credit and debit cards:

Credit and debit cards may have fees associated with them, like annual fees and overdraft fees. According to the CFPB, prepaid cards may charge fees for things like: 

1. Activating a new card

2. Monthly fees, such as maintenance fees

3. Making certain types of purchases

4. Withdrawing cash from an ATM

5. Reloading your card with cash

6. Checking the balance on your card

7. Transferring money between cards 

8. Not using your card for a certain amount of time

9. 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 the card is lost or stolen. 

And you can easily lock your card so it can’t be used if it’s ever lost, misplaced or stolen. Then, you can unlock it just as easily once you’re ready.

Credit cards generally require an application and approval process based on your credit history. On the other hand, prepaid cards typically don’t require you to have good credit.

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.

Merchants decide for themselves what forms of payment to accept. If a merchant accepts prepaid cards but yours is still declined, the CFPB says it could be for a few reasons. For example, the card might have insufficient funds or need to be activated before making a purchase. Or the merchant may have flagged the transaction as potential fraud. 

If you have questions about why a transaction was declined, the CFPB recommends checking your cardholder agreement or contacting the prepaid card issuer for help.

When your credit or debit card expires, your card issuer or bank sends you a replacement. Your prepaid card can also expire. If it expires with funds remaining, you could reach out to the prepaid card issuer to see if they can send you a replacement card or check. But there might be a fee to transfer the money.

You can buy prepaid cards at banks, grocery stores, drugstores and other retailers. Here’s the process for using a prepaid card:

1. Load money onto the card. Prepaid cards come with either a preset balance or an option to load money onto the card. 

2. Use the card for purchases. You can use the card to make purchases online, in person or over the phone until you’ve depleted the balance. If you spend more than the available balance, the transaction will typically be declined. 

3. Reload the card. Once the money runs out, you won’t be able to make more purchases until you reload more funds onto the card.

You may be able to use a prepaid card to withdraw cash at ATMs. But taking out cash with a prepaid card often comes with fees.

Once you’ve used the balance on a prepaid card, you’ll need to load 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.

Depending on the type of prepaid card, there may be a limit to how much money you can load at once. There may also be a limit to how much you can withdraw or spend. Check with the prepaid card issuer to review its terms.

Prepaid cards generally allow you to make purchases in the same way credit and debit cards do. A key difference is that prepaid cards aren’t linked to a bank account or line of credit. So before using one, you first have to load money onto the card. 

Prepaid cards typically have fewer protections than credit cards do. 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 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 to use, and using it won’t hurt your credit.