How Do Prepaid Cards Work?

Prepaid cards function similarly to debit and credit cards with a few key differences

Prepaid cards can be used to make purchases, similar to a debit card. But when you get a prepaid card, it 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 if a prepaid card is right for you, read ahead and learn what they are and how they work.

What Is a Prepaid Card?

Let’s start with the basics. You might hear prepaid cards referred to as pay-as-you-go 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. They 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 it.

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.

Why would you bother with any of this, though, in a world where you can simply use cash, debit or credit cards? There are several situations where a prepaid card could be helpful:

  • You don’t want to carry cash: A single card can be easier to carry than a wad of bills. And you may also find it to be a safer alternative to cash.
  • You want an extra layer of security: While a stolen prepaid card may 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.

How to Add Money to Prepaid Cards

Once you’ve used the balance on a prepaid card, you have to add more money to it if you want to keep using it. There are several ways to do this:

  • Deposit money directly to the card from a checking or savings account.
  • Deposit money to the card from paychecks or other sources of regular income.
  • Reload the card at a retail location using cash.
  • Purchase a reload pack to add a predetermined amount of money to your card. 

Prepaid Cards vs. Debit Cards vs. Credit Cards

A key thing 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 have the ability to 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.  

Do Prepaid Cards Build Credit?

The Consumer Financial Protection Bureau (CFPB) confirms that generally, prepaid cards won’t help build your credit history. 

When you use a prepaid card, you aren’t borrowing money and there’s no associated line of credit. That means activity on your prepaid card isn’t reported to any credit reporting agencies and doesn’t impact your credit score.

If your goal is to establish credit, you might consider applying for a traditional credit card. If that’s not an option though, there are other ways to build credit from scratch, like becoming an authorized user or getting a secured credit card.

One way to keep an eye on your score is by using a credit monitoring tool like CreditWise from Capital One. It shows you key factors that may impact your VantageScore® 3.0 credit score, provided by TransUnion. Plus you’ll get email alerts when something meaningful changes on your TransUnion credit report and more. Using CreditWise to keep an eye on your credit won’t hurt your score. And it’s free for everyone, not just Capital One customers.

Prepaid Card Limitations

While there are some situations where prepaid cards might be helpful, they come with certain limitations. 

One important thing to research before choosing a prepaid card are fees that might be associated with any number of different actions. According to the CFPB, you may get charged with fees for a number of reasons: 

  • Withdrawing cash 
  • Making purchases
  • Reloading your card
  • Checking the balance on your card
  • Speaking with customer service 
  • Not using your card
  • Making foreign transactions
  • Using your card every month

The CFPB also points out that these fees vary in amount, but can add up quickly. 

Prepaid cards may also come with fewer protections than your typical credit or debit card. The government has taken steps to provide legal rights for prepaid cardholders like a pathway to reimbursement should you lose your card or have it stolen. But these protections may not measure up to those of traditional credit or debit cards.

For example, you may need to register your card in order to get assistance from the card provider. Additionally, there’s a time limit for disputing charges. After that, you may be considered responsible for them, even if fraud was involved.

Prepaid Card Alternatives

Looking to give your credit score a boost? A secured credit card might be a good alternative. 

Even if your credit score is in what’s considered the bad or poor range, a secured card might be an option to help you build your credit with responsible use.

Considering Purchasing a Prepaid Card?

Prepaid cards do come with limitations and aren’t meant to help you build your credit. But they can offer an easily accessible way to make cashless purchases and may even be beneficial under the right circumstances. 

Learn more about Capital One’s response to COVID-19 and resources available to customers. For information about COVID-19, head over to the Centers for Disease Control and Prevention

Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

Your CreditWise score is calculated using the TransUnion® VantageScore® 3.0 model, which is one of many scoring models used by lenders. It likely won’t be the same model your lender uses, but it is an accurate measure of your credit health. The availability of the CreditWise tool depends on our ability to obtain your credit history from TransUnion. Alerts are based on changes to your TransUnion and Experian® credit reports and information we find on the dark web. The tool is not guaranteed to detect all identity theft.

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