What’s a Prepaid Card, and Can It Help You Build Credit?

A prepaid card is a card that can be loaded with funds that aren’t linked to a bank account. The user can spend up to the amount of money on the card.

These prepaid forms of payment are often used as gifts and rewards, but people with limited access to standard banking options or limited budgets often use them instead of a checking account.

There are different types of prepaid cards to choose from, including:

• free prepaid debit card
• reloadable prepaid cards
• no limit prepaid debit card

Ensure you understand the terms and limits of these card types before you use one. Each prepaid card carrier has an agreement that you can review in detail before signing up and refer to while using the card.

With a prepaid card or reloadable debit card, you load money onto the card and use it to make purchases or withdraw cash from an ATM. Here are options you have to load money onto your prepaid debit card:

• Arrange for a paycheck to be directly deposited onto the prepaid card. You’ll need to contact your prepaid card company to obtain the account and routing numbers needed to set up direct deposit. Not all cards have this feature enabled, so check the details of the prepaid card you want to buy if you prefer loading it with direct deposit.¹
• Add funds to your card at retailers or financial institutions like Walmart or a currency exchange location.
• Transfer funds onto your card from an existing bank account. This can be done online by connecting the external bank account for transfers through your prepaid card account.

You can swipe or insert a prepaid debit card into a point-of-sale system to purchase or enter your card number and expiration date online. Prepaid cards can also be used to pay bills, but not through ACH, since prepaid cards are not connected to bank accounts.

Prepaid cards and debit cards may seem similar, but they are different. Debit cards are connected to your bank account. They may have overdraft, maintenance, and out-of-network ATM fees. With a prepaid debit card, you load the account associated with the card with money from an external source before you make a purchase.

Credit cards are also different from prepaid cards. With a credit card, you borrow against your credit limit by making purchases. Then, you either pay the balance off or make the minimum required payment at the end of the month. This can also help you build up your credit score.

Many credit cards work by offering rewards such as points or cash back that can be redeemed for statement credits, travel, or merchandise. While a credit card can be a great tool to help you build credit, you are charged interest on the remaining unpaid balance at the end of each billing cycle.

Prepaid debit cards don’t help you improve your credit score. That is because you’re loading your money onto the card and spending it instead of borrowing money and repaying it over time. Prepaid cards are a banking alternative that can help you make purchases, avoid overspending, and manage your money.

While there is no such thing as a prepaid credit card, a secured credit card is another tool that can help you build credit. With a secured credit card, you pre-pay a deposit that becomes the credit limit you can borrow against.

Payments are reported to the three major credit bureaus, and there are no annual fees, large security deposits, or interest.

The upsides of going with a prepaid card are:

1. You don’t need to apply for a bank account to get a prepaid card. While you won’t have a checking account number or routing number, some prepaid cards like RushCard allow you to set up direct deposit.²
2. There are no credit checks or inquiries into your banking history when you get a prepaid card.
3. They can be a smart option if you can’t access a credit card or bank account.
4. If you’re trying to budget using mainly cash and want to avoid overspending, prepaid cards can be helpful.

While prepaid cards can be convenient, these cards also have some limitations.

1. One of the biggest disadvantages is that prepaid debit cards have several fees. Some of these fees include monthly maintenance, cash reload, and out-of-network ATM fees. Prepaid cards make you pay for the convenience of not setting up a bank account through costs to reload your card, withdraw money, and use the card each month.
2. Some prepaid cards charge an inactivity fee if you don’t make any transactions during a specific timeframe. Netspend® is one prepaid card option that charges different fees based on your chosen plan.³
3. You won’t have access to banking services or the ability to stop payments.
4. If you cannot set up direct deposit with your prepaid card or use a mobile check deposit feature, this may add an inconvenience. You’d need to cash your paycheck somewhere (subject to a check cashing fee), then go to a reload location in the area to load your card.

There are other options if you’re looking to avoid maintenance fees and credit checks. Accounts like those offered through Chime provide an alternative to prepaid cards and even allow you to open an account with bad credit and no deposit.

A prepaid card can be helpful if you want to avoid getting a bank account or having a credit check. However, there are some drawbacks, like fees and the inability to build credit.

Weigh all your options before getting a prepaid card, including debit cards with low or no fees. You may also want to explore the possibility of building a positive credit history. Find out what to consider before choosing a credit card or debit card.