Tap, Load, Spend: How Do Prepaid Cards Work?

During your daily spending, you may find yourself reaching for your debit or credit card all too often and lose track of just how much you’re spending. If you want to stop overspending and distance yourself from your credit and debit cards, products like prepaid cards are a great solution.

But how do prepaid cards work, exactly?

These cards function similarly to debit and credit cards, but they also offer unique features that can help you avoid overdraft fees, manage your spending, and even secure your online transactions. Here’s a look at how you can use them and when they might be useful.

What is a prepaid debit card?

A prepaid debit card (also known as a prepaid card) is a payment card that you load a set amount of money onto. Once loaded, you can use it to make purchases, withdrawals, or online transactions up to the prepaid amount. Unlike a regular debit card, which draws money from a checking account, or a credit card, which allows you to borrow money up to a specific limit and pay it back later, a prepaid card requires you to "prepay" your transactions.

Here’s how to get a prepaid card: find a retailer, either in-person or online, choose your card (like Visa Prepaid Card, American Express Serve, or Netspend Prepaid Mastercard), and add your desired amount to complete the purchase. Then, you can use your new card to make online and in-store purchases, pay bills, or withdraw cash from an ATM — just like a traditional debit card. They’re also usually reloadable once you exhaust your funds, so you don’t need to keep purchasing new ones.

Prepaid cards versus debit cards

At first glance, reloadable prepaid cards and debit cards might seem identical. Both are plastic cards that allow electronic access to funds, but they differ when it comes to fees, security, and funding sources. Here's a breakdown of what sets them apart:

- Source of funds: A debit card links directly to your bank account, and when you make a purchase, you pull money from that account. If you spend more than what’s in your account, you’ll have a negative balance or “overdraft” in your account. On the other hand, a prepaid card requires you to load money onto it before you use it. The card then deducts the purchase amount from the loaded balance and declines any purchases that would exceed the balance.

- Overdraft fees: One of the significant advantages of prepaid debit cards is the absence of overdraft fees. Since you can only spend what's loaded, there's no risk of going into the negative. With debit cards, unless you've opted out of overdraft protection, you’ll incur fees if you spend more than what's in your account.

- Security: Both cards offer security, but prepaid cards provide an extra layer. Unlike debit cards, they don’t link to your bank account, which helps limit the potential for financial harm or loss if an unauthorized party gets a hold of your card.

- Types of fees: Prepaid cards usually have monthly fees, reload fees, and money withdrawal fees. You can review the terms and conditions to better understand the fee structure. On the other hand, banks implement distinct fees for debit cards, such as maintenance fees and charges for using out-of-network ATMs.

Why use a prepaid card?

Here are some of the benefits of using a prepaid card instead of other payment methods:

- Avoid carrying cash: Carrying cash is becoming less important as more stores transition to fully digital payments. Prepaid cards offer a reliable, easy-to-carry alternative you can use almost anywhere.

- Add an extra layer of security: Prepaid cards provide extra protection from fraud because they don’t link directly to your bank account. This means there’s a limit to financial fallout (only the extent of your balance) if someone gains unauthorized access.

- Control your spending: Overspending can be a concern, especially with credit cards. Prepaid cards act as a check against this since you can only spend the amount loaded on the card, helping you stick to a budget and avoid more debt.

- Use as a checking account alternative: Not everyone has or wants a checking account, and prepaid cards serve as a useful alternative. They let you perform most of the same actions that a regular bank account would, including direct deposit of your paycheck or mobile check deposit.

How to put money on a prepaid card

You typically have a few options for loading money onto your prepaid card. Here are some standard methods:

- Add funds at retail locations: Certain retailers, like Walmart, allow you to load money onto your prepaid card directly at their stores. If you prefer to use cash over other payment methods, this option is ideal.

- Online transfer: If you have a traditional bank account, you can easily transfer funds to your prepaid card. Visit your card issuer’s website and follow the instructions for adding funds. You may need to create an account, and you can either typically use your debit card or bank account to pay.

- Direct deposit: You can call your prepaid card’s customer service line and arrange to have your paycheck or other regular payments deposited directly onto your card. This method makes sure you’ll have access to your funds and eliminates the need for paper checks.

- Purchase a "reload pack": You can find reload packs at various retail stores. These act as vouchers to refill your card. After you buy them, go online or call the customer service number on the back of your card to apply the funds.

It’s important to note that most credit card companies and prepaid card issuers won’t let you use a credit card to add money to a prepaid card. This is to prevent debt accumulation through such transactions. If a company does allow this, they may charge high fees and treat the transactions as cash advances. If you’re worried about adding to your debt, it’s best to avoid this option.

Prepaid credit cards will not affect your credit score

Using prepaid cards doesn’t impact your credit score because you’re using your own money and not borrowing it. This also means that issuers don't need to assess your creditworthiness or report your usage details. Because these cards don't require a credit check to be issued, they’re an excellent choice for anyone with a low credit score or no credit history.
On the flip side, this means using prepaid cards won’t help you build credit. If this is your goal, consider exploring secured credit cards. These are special cards that require a security deposit and give people with poor credit the opportunity to improve their credit score.

Beyond credit and debit: The appeal of prepaid cards

Prepaid cards offer a unique blend of features that credit and debit cards can’t fully replicate, like helping you stick to a budget and separating your financial accounts from your payment method. For those seeking additional tools to enhance their financial well-being, the EarnIn App is a valuable option. Our innovative app helps you monitor your credit and avoid missing credit card payments, giving you the information you need to take charge of your money and build financial momentum.

Our Cash Out tool also lets you access your pay as you work — not days or weeks later. You can get up to $100 a day and up to $750 every pay period with no credit checks, no interest, and no mandatory fees. If you’re looking for a powerful, user-friendly financial tool with mobile access, advanced security, and 24/7 support, download the EarnIn app and experience money at the speed of you.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.