A prepaid card lets you load a cash balance ahead of time and use it anywhere your card network鈥擬astercard, Visa, Discover, or American Express鈥攊s accepted. In that sense, it鈥檚 very much like a debit card, but without the bank account attached.

Why would you need one? Traditional credit and debit cards carry certain risks that some consumers would rather avoid. And those with lower credit ratings may be subject to particularly onerous interest rates, making the risks and cost of carrying a balance higher than average. Meantime, cash-free transactions are ever more ubiquitous鈥攚hich makes it easier to pay bills, book a hotel room, or put gas in your car, but harder to avoid carrying some kind of card.

For millions of Americans, the solution is a reloadable prepaid card. And thanks to a new rule from the Consumer Financial Protection Bureau (CFPB) that , there are important new protections for consumers who use them.

What is a Prepaid Card?

A prepaid debit card is similar to a reloadable gift or stored value card. A prepaid debit card is loaded with a certain amount of cash, either through direct deposit or a cash load, which can be used the same way that a credit card is used. Unlike a credit card the payment is immediately deducted from the balance that has been loaded on the card. Once the balance is depleted or any time the customer wishes, the card can be reloaded with cash or funds from another account.

An Overview of Prepaid Cards

With a prepaid card, you load a balance ahead of time and use it anywhere your card network鈥擬astercard, Visa, Discover, or American Express鈥攊s accepted. In that sense, it鈥檚 very much like a debit card, but without the bank account attached.

That has appeal for a lot of consumers. You get the convenience of an electronic transaction without having to worry about overdraft fees. Nor will you incur the steep interest rates that a credit card would charge. (Some people call these cards "prepaid credit cards," but that's a misnomer鈥攖here's no credit involved.)

Among certain consumer groups, particularly 鈥渦nbanked鈥 adults without a traditional bank account, prepaid cards have become a popular way to make cashless transactions. According to a 2017 FDIC survey, more than 9% of American households are using prepaid cards for financial transactions.

Even so, prepaid cards charge certain fees that traditional bank accounts don鈥檛, so you鈥檒l want to make sure the benefits outweigh the risks before signing up for one.聽But the CFPB rule should also make it easier to choose a card with the lowest fees.

How Prepaid Cards Work

Prepaid cards feature many of the same benefits you鈥檇 get with a checking account. You can use them to make in-store and online purchases, pay bills, withdraw money from an ATM, even deposit checks into your prepaid card account. And many of these cards, such as and the , offer apps that let you keep track of your balance, review transactions, and transfer funds.

Key Takeaways

  • Prepaid cards are a form of debit card where you spend money you鈥檝e already loaded onto the card.
  • While prepaid cards are catching on among 鈥渦nbanked鈥 consumers, some individuals use them in tandem with a checking account to limit their discretionary spending.
  • Issuers may charge setup, reloading, and purchase fees鈥攊n addition to a fixed monthly fee. It鈥檚 a good idea to understand exactly what those charges are before buying a card.

Rewards

Some issuers even provide rewards programs, much like credit cards. The , for example, offers unlimited 1% cash back on all your purchases. And the Walmart MoneyCard lets you earn as much as 3% cash back when you use it at Walmart.com, or 1% cash back for purchases at Walmart stores.

Peace of mind

Adding to their appeal is the peace of mind they provide users. As of April 1, 2019, cards marketed as "prepaid" are covered by the Electronic Funds Transfer Act; that means companies have to investigate and reimburse you for unauthorized charges or errors . You may also be eligible for certain additional protections offered by the card鈥檚 network. However, in order to get those benefits, you have to register the card with the issuer.

Most cards are also FDIC-insured, protecting balances up to $250,000 from a bank failure (again, you need to register your card to obtain coverage). The CFPB has also ruled that issuers have to provide a warning if they don't offer this insurance.

Also check that the card you choose is equipped with an EMV chip to limit the chances of identity theft.

No credit required鈥攂ut no credit-building

Customers can purchase a card at many supermarkets and convenience stores, as well as directly through a bank or card issuer. Since you鈥檙e only spending the money you deposit, there鈥檚 no credit check required to get one. While a spotty borrowing history doesn鈥檛 hinder your chances of obtaining a prepaid card, having one also doesn't help you improve your credit score.

Reloading options

When your balance drops, prepaid card users have several options for reloading funds. Depending on the card, you may be able to:

  • Transfer money from a bank or PayPal account.
  • Deposit funds at a bank or at participating retailers.
  • Add funds by purchasing a 鈥渞eload pack."
  • Set up a direct deposit for your paycheck (cards come with account and routing numbers, which make this possible).

Reasons to Get a Prepaid Card

While they work in many ways like a typical debit or credit card, prepaid versions offer certain advantages over these other forms of payment.

Prevent overspending

Prepaid cards can be a great way to stay out of debt, since you can鈥檛 spend more than the amount you already deposited. It鈥檚 also a nifty budgeting tool. Even if you have a checking account, you can put a fixed amount on your prepaid card for certain spending categories, such as eating out. When your allowance for the month dwindles, you鈥檙e forced to do a little belt-tightening.

Avoid overdraft fees

Banks have no problem with slapping customers with steep penalties when they overdraw their checking account. Last year, the average overdraft fee nationwide was $30 per transaction, according to the research firm Moebs Services. Some banks let you turn off overdraft protection, but it may be easier still to get one of the many prepaid cards that never charge these fees.

Limit losses

You can鈥檛 lose more than the balance on your prepaid card, even if you become the victim of fraudsters. If you use a debit card instead, its liability protection likely has you covered, but some consumers prefer using their prepaid card when making an online or in-store transaction, rather than putting their full checking account at risk.

Much like a traditional debit card, you can use prepaid cards to make purchases, pay bills online, withdraw money, or deposit checks.

Overcome a poor banking history

Did you leave your last bank with unpaid fees? If so, it could come back to haunt you when you try to open a checking account at another institution. Banks order a bank history report before letting you open an account, which will show any previous accounts that have been 鈥渃losed for cause.鈥 Prepaid cards require no such checks, so it鈥檚 a way to go cashless, even if other avenues are closed to you.

Teach kids how to manage money

Prepaid cards are a convenient way to teach kids about managing money and navigating an increasingly cash-free economy. is among the products aimed at this market (and it gets rave reviews online). Families can easily transfer money between cards, making it a breeze to pay kids an allowance or reimburse them for chores. And with the accompanying app, parents can see exactly how their kids are using those funds. There鈥檚 a monthly subscription fee of $5.99 per family, although prepaid plans significantly reduce that cost.

Pros
  • Prevents Overspending

  • Avoids Overdraft Fees

  • Limits Liability in Case of Fraud

  • Money Education for Kids

Cons
  • Does Not Build Credit History

  • High Fees

Beware of Hefty Fees

Though they offer some compelling benefits to unbanked and budget-conscious consumers, prepaid cards have a big Achilles heel: fees. While the individual charges are modest, they鈥檙e seemingly everywhere.

Depending on the card you choose, you may face an activation fee, monthly fees, transaction fees, and reloading fees. Some even assess inactivity fees if you don鈥檛 use your card for an extended period of time.

Needless to say, fees can add up quickly.聽Take the Green Dot debit card. While it鈥檚 become a popular choice for its generous 5% cash back reward, the card charges up to $1.95聽for in-store purchases, $4.95 for reloading your balance at a register, and $3.00 for ATM withdrawals鈥攐n top of its $9.95 monthly service fee.

Some products, such as the , reduce your monthly service charge when you set up a monthly direct deposit. Even so, prepaid cards can be a costly alternative to regular bank accounts.

You鈥檒l want to do some digging and read the disclosures to figure out what the fee schedule looks like before pulling a card off the store shelf. The CFPB rule aims to make that process simpler for users. Now, issuers have to provide a short fee chart on the outside of the card packaging, as well as a more detailed chart on the inside. They also must post fee information online on the company website. One other piece of good news: Basic account information must be provided free, including account balances by phone and transaction information online and by mail on request.

The Bottom Line

If you鈥檙e looking to control your spending and stay out of credit card debt, prepaid cards might just be the answer. There are myriad options on the market, so look for ones that are easy to use and reload without paying a fortune in fees.