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

A prepaid card is a payment card you load with your own money before using it – no bank account required. Once you spend the loaded amount, you’ll need to reload it to keep using the card.

People often use prepaid cards as gifts or to manage their budget. They can also be useful if you don’t have access to traditional banking options.

A debit card links directly to your checking account, letting you spend money you already have in the bank. It’s a safe alternative to cash for shopping online, paying bills, and taking out cash at the ATM.

Debit cards often come with mobile banking apps that help you track spending and set up direct deposit for your paycheck.

While they look similar, prepaid and debit cards work differently. Here’s how they stack up:

How you get each card

Prepaid cards are easy to buy at retail stores or online without a bank account or credit check. This makes them accessible if you’ve had banking challenges.

Debit cards require opening a checking account with a bank or other financial institution, which usually involves verifying your identity. Many financial institutions don’t require a credit check or minimum deposit.

How you add money

A prepaid card requires you to load funds before you can spend them. You can do this through direct deposit, cash reload at a store, or a transfer from an existing bank account.

Debit cards access funds directly from your checking account. As soon as money is deposited into your account, it’s available to spend or withdraw at an ATM via your debit card.

Fees you’ll pay

Prepaid cards often come with monthly, transaction, ATM, and reload charges. These costs can add up quickly and eat into your balance.

Debit cards might charge for overdrafts, monthly service, or using an out-of-network ATM. However, some modern financial institutions have eliminated these costs entirely.

Fraud protection and safety

Debit cards generally offer strong fraud protection under federal law (the Electronic Fund Transfer Act), including rights related to unauthorized transactions and error resolution. Your money is generally protected if your card is lost, stolen, or wrongfully charged – as long as you report it quickly.

Prepaid cards may offer fewer protections, especially unregistered cards. Even with the CFPB rules from 2019, which expanded protections and adjusted error resolution requirements, there’s no requirement for issuers to replace stolen funds on unregistered prepaid cards.

Spending controls

Prepaid cards stop working when your balance hits zero. This prevents you from overspending but can leave you stranded if you run out of funds unexpectedly.

Some debit cards offer fee-free overdraft coverage for small purchases that exceed your balance, giving you a safety net without costly fees.

Your checking account may also have the option of overdraft protection, which transfers money from a linked account, such as a savings account, if you overspend.

Not sure which type of card fits your life right now? Here’s how to decide.

Consider a prepaid card if:

• You don’t have a bank account and need electronic payment options
• You want to gift a specific amount to someone learning to budget
• You want strict spending limits without opening an account

Consider a debit card if:

• You want your money to have FDIC insurance, which is protection from the Federal Deposit Insurance Corporation up to the standard coverage limit (generally $250,000 per depositor, per FDIC-insured bank, per ownership category).
• You want mobile banking features to track spending
• You want to avoid reload and monthly maintenance fees

Credit cards are different from both prepaid and debit cards because you’re borrowing money rather than spending your own. When you use a credit card, the issuer pays the merchant, and you pay the issuer back later.

Credit cards: How they work

Credit cards give you a credit limit based on your credit score. You can spend up to that limit, and if you pay your full balance by the due date, you typically won’t pay interest.

If you carry a balance from month to month, you could rack up hefty interest charges. The average credit card interest rate is nearly 21%.

A good guideline is to use no more than 30% of your credit limit and pay it off in full each month. According to FICO, your credit card utilization is a key factor in your credit score.

When you might want a credit card instead

Credit cards are powerful tools for building credit history. The companies that issue them report your borrowing and payment history to the three major credit bureaus.

Many credit cards offer rewards like cash back or travel points. If you can manage credit responsibly, they offer great benefits.

The short answer is no. Neither prepaid cards nor standard debit cards help you build credit because you aren’t borrowing money. Your activity isn’t reported to credit bureaus.

If your goal is to build credit, consider a secured credit card where you pre-pay a deposit that becomes your credit limit. Secured card issuers report your payments to the three major credit bureaus (Experian, Equifax, and TransUnion), which are companies that compile credit information.

Once you’ve improved your credit, you can graduate from a secured credit card to an unsecured credit card, which doesn’t require a deposit and may offer a higher credit limit.

Choosing between a prepaid card and a debit card comes down to your access to banking and your financial goals.

• If you choose a prepaid card: Look for one with low fees and read the fine print about reload costs.
• If you choose a debit card: Compare fee-free checking accounts that don’t require minimum balances.
• If you want to build credit: Look into secured credit cards that report to credit bureaus.

Whatever you choose, taking control of your payments is a positive step toward financial progress.