A debit card is a payment card that takes money from a linked bank account. A prepaid card is not linked to a bank account and instead uses the money you load into it. A prepaid card can be useful for people who are trying to budget or don’t have a bank account. However, prepaid cards also have unique drawbacks.
If you’re trying to choose between a traditional debit card and a prepaid card, here are the main differences.
Discount rate overview
Note that neither a prepaid card nor a debit card helps you build up credit. If it’s important to you, a secured credit card can perform the same functions as a debit card and help you build credit.
What is a debit card?
A traditional debit card is a payment card issued by a financial institution and is linked to money in a linked checking or savings account. Unlike a credit card, which is basically a loan that renews itself every time you pay your bill, a debit card only lets you use the money you already have in your account.
Who should use a debit card?
If you have a bank account, a debit card is a handy tool. It’s safer and more convenient than carrying cash, and there are plenty of no-fee checking accounts on the market.
Disadvantages of debit cards
Compared to prepaid cards, traditional debit cards do not have many disadvantages. In other words: if you can get a traditional debit card, you should. That said, there are a few things to watch out for, as with any financial product.
- Barrier to entry—Most banks and credit unions don’t check your credit score when you apply for a checking account, but they can see your banking history. It’s rare, but sometimes banks turn down applicants if they have a history of overdrafts, bad checks, or other risky behavior. On the other hand, prepaid cards can simply be purchased like any other retail product.
- Costs—There are many no-fee checking accounts out there, and prepaid cards usually come with additional fees, but this is something to watch out for.
- Minimum balance required—Some checking accounts require you to keep a certain amount of money or you will incur fees. There are many checking account options without this requirement, but it’s important to be careful.
What is a good debit card?
When you choose a traditional debit card, you also choose a checking account. Most major financial institutions offer debit cards, so just pick your favorite. If you’re new to banking, you might like Capital One’s 360 Chequing Account. There is no minimum balance requirement and no monthly maintenance fees.
Prepaid cards
A prepaid card is like a debit card, but instead of linking it to a bank account to withdraw funds from, you pay up front to load money onto the card, like a gift card. You can continue to load money onto the card over time.
Prepaid cards can be retailer specific or general purpose (meaning you can use them anywhere). You can use prepaid cards to make purchases in stores or online, just like a traditional debit card.
In the past, prepaid debit cards were not accepted by most retailers. Today, you can use prepaid debit cards at most in-store and online merchants. However, there’s no guarantee that every merchant will accept prepaid cards, so it’s good to have a backup payment method.
Just like a traditional debit card, prepaid cards won’t let you make a purchase if you don’t have enough funds in your account.
Who should use a prepaid card?
Prepaid cards can be a good option if you don’t have a bank account and can’t open one. For this reason, people with poor credit and younger consumers sometimes opt for prepaid cards.
They are also practical for strict budgets. If you have a bank account but only want yourself or, say, your child to spend $100 a week, you can load a prepaid card with that amount and use it only for payments.
Disadvantages of prepaid cards
Compared to traditional debit cards, prepaid cards have many disadvantages.
- Costs—Many prepaid cards charge fees for money top-up, monthly maintenance, ATM withdrawal, inactivity, and transactions.
- Purchase limits—You may be limited to a maximum purchase amount per day, such as $1,000.
- Inability to deposit cash or checks—Many prepaid cards do not allow you to load funds in the form of cash or checks, as you might do for a checking account at an ATM.
- Lack of free ATMs—If you want to use an ATM to withdraw money from your prepaid account, your options will likely be limited and you will likely have to pay a fee.
- No cash back at retailers—With a debit card, you can usually withdraw money from your account by requesting cash back from a retailer you make a purchase from. Prepaid cards often do not allow this.
- Less mobile app support—Mobile banking is convenient. With a debit card, you can usually check your balance, deposit checks, and transfer money to your phone. Prepaid cards generally do not offer mobile applications.
- Not convenient to top up money—Each time you deplete your balance, you will need to top up funds to the card to continue using it.
- Not as secure as debit cards—Prepaid cards offer less protection against fraud than debit cards.
What is a good prepaid debit card?
If you’re looking to avoid many of the drawbacks of prepaid cards, the American Express® Bluebird® Reloadable Prepaid Card is a good choice. There are no monthly fees and free withdrawals from network ATMs. You can also load money onto your card for free at Walmart.
The bottom line
Debit cards are payment cards connected to a bank account, from which they take funds as you make purchases. Prepaid cards, on the other hand, are not linked to a bank account. Instead, you load money directly onto the card.
In general, it is more convenient and safer to have a traditional debit card than a prepaid card. But if you’re unable to open a bank account or are on a strict budget, prepaid cards may be more accessible. When pursuing either option, be sure to understand all associated fees.