What is a prepaid card, and how does it work?
Similar to credit and debit cards, prepaid cards can be used to make purchases. But unlike those cards, a prepaid card comes with a 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:
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Like credit and debit cards, prepaid cards can be a simple and safe alternative to carrying cash.
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There are different types of prepaid cards, including debit, payroll, government benefit, student and gift.
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Prepaid cards can be used to make purchases as long as they have an available balance.
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There are often fees associated with prepaid debit cards.
What is a prepaid card?
A prepaid card can be used to make purchases or pay bills the same way you would with a credit or debit card. But similar to a gift card, you deposit—or load—money onto the card. You might hear prepaid cards referred to as prepaid debit cards, prepaid credit cards, pay-as-you-go cards or stored-value cards.
Other types of prepaid cards
According to the Consumer Financial Protection Bureau (CFPB), “prepaid cards” can refer to more than just reloadable cards. It could also be a reference to:
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Payroll cards employers use to deliver paychecks
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Government benefit cards used by some agencies to pay benefits like unemployment insurance
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College ID cards can also function as prepaid cards.
Gift cards are another type to be aware of. The CFPB says they’re not technically prepaid cards. But they could function similarly, especially if they’re tied to a network that allows them to be used at more places than a single merchant.
How do prepaid cards work?
You can buy prepaid cards at banks, grocery stores, drugstores and more. The 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.
A prepaid card functions in some ways like other cards. This means you typically can use it for purchases you make online, in person or over the phone. In some cases, you can use it at ATMs for cash withdrawals.
Prepaid card vs. credit card vs. debit card
When you use a prepaid card, you’re only using the money that you’ve loaded onto it. You aren’t borrowing any 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.
3 drawbacks of prepaid cards
While there are some situations where prepaid cards might be helpful, they can come with some disadvantages.
1. Potential fees
One important thing to remember with prepaid cards is that there are fees associated with certain actions. According to the CFPB, you may be charged fees of varying amounts for several reasons, like:
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Activating a new card
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Paying a set monthly fee for having the card
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Making certain types of purchases
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Withdrawing cash from an ATM
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Reloading your card with cash
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Checking the balance on your card
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Transferring money between cards
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Not using your card for a certain amount of time
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Making foreign transactions
2. Fewer protections than credit or debit cards
According to the CFPB, there are some protections for prepaid cards. But they may not be as robust as protections for credit cards. For example, Capital One credit cards come with $0 liability for unauthorized charges if your card is ever lost or stolen.
3. Doesn’t build credit
When it comes to your credit scores, prepaid card activity isn’t reported to the three credit bureaus, so your credit 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.
Prepaid card FAQ
Take a look at the following frequently asked questions about prepaid cards to better understand how this type of card works:
How do you put money onto a prepaid card?
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 regular 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.
Are there limits to how much can be added to a prepaid card?
Depending on the type of prepaid card, there may be a limit to how much you can add and reload at once. There may also be a limit to how much you can withdraw or spend. Check with the issuer to review its terms.
Can a prepaid card expire?
Yes, prepaid cards can expire. The expiration date is usually noted on the front or back of the card. If your prepaid card expires with funds remaining, reach out to the prepaid card company to see if they can send you a replacement card or check. Keep in mind, though, a fee might be charged to transfer the money.
Key takeaways: Prepaid cards
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. Keep in mind that there may be fees to activate or use prepaid cards.
If you’re new to credit or searching for your next credit card, Capital One can help:
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See if you’re pre-approved for credit cards, without harming your credit scores.
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If you’re looking to build your credit with responsible use, explore cards for people with fair credit.
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Earn unlimited 1.5% cash back on every purchase, every day with a cash back rewards card.
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Monitor your credit report and score with CreditWise from Capital One. It’s free for everyone, and using it won’t hurt your credit.
