Prepaid vs. Debit Cards: Here’s Which One You Should Choose

By Susan Shain
October 30, 2019

In 2003, Americans put less than $1 billion on reloadable prepaid cards. In 2012, they put $65 billion on them.  

By 2020, the Consumer Financial Protection Bureau (CFPB) expects that number to grow even further: to $116 billion. 

But what, exactly, are prepaid cards? How do they differ from debit cards? And which one is better for you? Keep reading for all the answers to your prepaid card questions. 

What is a prepaid card?

At first glance, prepaid cards seem just like debit cards. And they do have their similarities.

As Korrena Bailie, senior editor for Wirecutter Money, explains: They both provide a way “to make cashless payments without getting a line of credit.” Because of that, you should also note that neither prepaid nor traditional debit cards will help your credit scores; for that, you’ll need a credit card or credit builder loan. 

The purchasing process is almost identical, too. Once you’ve loaded money onto a prepaid card, you can swipe it anywhere its payment network is accepted — whether that’s at a restaurant, movie theatre, or online store. You can also use prepaid cards to withdraw cash from an ATM. 

But don’t be fooled: Prepaid cards and debit cards are not the same thing. 

Whereas debit cards are connected to your checking account, prepaid cards only let you spend the amount you’ve loaded onto them. 

In fact, that’s what many people find appealing: A 2014 survey from Pew Charitable Trusts discovered that most Americans use prepaid cards to “gain control over their finances.” 

Others might use prepaid cards because they don’t qualify for a traditional bank account, have concerns about identity theft and privacy, or want an easy way to teach their children about budgeting. Something to note: If you think you can’t get a checking account, second chance banking may change your mind.

How prepaid cards work

Curious about how to get a prepaid card and how these cards work? 

You can buy them online or at a variety of retailers, including most supermarkets, big box stores, and drugstores.

You decide how much cash you want to load on the card, and voila, you’ve got the convenience of paying with plastic. There aren’t any credit checks, and if you’re purchasing the card from a store, you won’t even need to share any personal information. 

If you try to buy something that costs more than the balance remaining on your card, your purchase will be declined — which is why some people use prepaid cards as a way to stay under budget and avoid overdrafting. (Some prepaid card suppliers do allow you to sign up for “overdraft protection,” but we don’t think the high fees are worth it.) 

When you’re ready to reload your card with more cash, you have a variety of options. Here are some popular ones: 

  • Set up direct deposit with your employer (cards come with routing and account numbers)
  • Transfer money from a bank or PayPal account
  • Deposit money at an affiliated bank or participating retailer
  • Virtually deposit a check through your card’s mobile app
  • Physically deposit a check at an ATM

Another thing to know about these cards: Some employers offer prepaid “payroll cards” in lieu of paychecks, and the government also offers benefits on prepaid cards. Yet, it’s important to note that if an employer offers you a prepaid card, you have the right to ask for other methods of payment instead, like direct deposit.

Are prepaid cards safe? 

Until recently, prepaid cards had very few protections. If your card was lost or stolen, it was like cash, and you were out of luck.  

But in April 2019, a new CFPB prepaid cards rule went into effect. Among other things, this made fees more transparent and offered recourse in case of loss or theft. To qualify for these protections, you must first register your card on the issuer’s website. Registering will also make you eligible for FDIC insurance, which protects you if your bank fails. Note: If a card doesn’t offer FDIC insurance, it must say so on the packaging.

Once your prepaid card is registered, your liability will be limited to the following amounts, depending on when you report the card’s loss: 

  • Within two days: up to $50 
  • Within 60 days: up to $500
  • More than 60 days: no limit 

If the investigation will take longer than 10 business days, the CFPB also states that card providers are generally required “to credit the disputed amount to your account while investigating the problem.” 

Two reasons a debit card is better than a prepaid card

Although the new CFPB rule makes prepaid debit cards much more secure, we’d still say that traditional debit cards rule the roost. 

David Bakke of Money Crashers agrees. He says that “true debit cards are almost universally a better choice over prepaid debit cards.” 

Translation? Instead of wondering “what is the best prepaid debit card?” you might want to consider a traditional debit card instead. 

Here are two major reasons why. 

1. Lower fees

The majority of prepaid debit cards come with a barrage of fees for everything from withdrawing cash to reloading the card to using the card. Some even charge for calling customer service.

With the popular Green Dot Prepaid Visa, for example, you might pay: 

  • $1.95 to purchase the card
  • $7.95 per month
  • $5.95 to reload the card
  • $3 to use an ATM

So, in one month, if you bought the card, reloaded it twice, and withdrew cash three times, it would cost you more than $30! 

Most debit cards, on the other hand, will cost you less than this. The average checking account fee, for instance, is less than $6 per month — and debit cards don’t require “reloading” or charge in-network ATM fees. Plus, if you bank with Chime, you’ll pay no fees.  

2. Wider usage

Want to book a hotel? Or rent a car? With a prepaid debit card, this might be a problem. 

Loren Sweigart of Supporting Strategies discovered this the hard way. 

I went to a U-Haul rental that accepts debit cards,” she says, “so I tried to use my prepaid debit but they wouldn’t accept it.” 

That’s not unusual. Vendors who need to put a hold on your card may be reticent to accept one that’s prepaid — especially if it doesn’t have a name or expiration date. 

An alternative to prepaid cards 

If you’re ready to leave the fees and hassle of prepaid debit cards behind, look no further than the Chime debit card. It’s a fantastic – and FREE – prepaid card alternative. 

We won’t even check your credit when you apply. All we ask is that you’re 18 or older, and a citizen or permanent resident of the United States. 

The Chime debit card offers a slew of sweet perks and features, including: 

  • No unnecessary fees, ever
  • Free overdrafts with SpotMe
  • The option to freeze your card or order a replacement from within the app
  • More ATMs than the top three biggest banks combined (over 38,000!)
  • The ability to round up your change into a separate account
  • EMV chip technology for convenience and security
  • Connection to the Visa network, the most widely accepted worldwide
  • FDIC insured up to $250,000

What are you waiting for? Get started with the Chime debit card today.

Susan Shain is a freelance writer who's been covering personal finance for eight years. She was previously on staff at The Penny Hoarder and Student Loan Hero, and has also been published by Marketwatch and Lifehacker.

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