Prepaid Cards: What's the Catch?

Bank cards, store credit cards, secured cards, prepaid cards — there’s lots of plastic out there, and even though they’re all forms of payment, these products are completely different. One isn’t necessarily better than the others; it depends on your needs as a consumer, and no matter what you choose, it’s important to understand its perks and drawbacks.

Prepaid cards are a kind of debit card commonly mistaken for credit cards, and there are several things to know before putting one of them in your wallet.

Reasons to Go Prepaid

For someone without a credit card or a traditional bank-linked debit card, a prepaid debit card is an easy way to access some of the conveniences of those products. It allows the cardholder to shop online or make purchases over the phone, which are things most consumers do on a regular basis; some cards even offer mobile banking. One of the biggest advantages of having a prepaid debit card is the ability to pay bills online, which usually isn’t possible without a credit card or checking account. As such, prepaid cards are popular among the under- and unbanked. It can also keep you (or a teenager) on budget, because you can’t spend more than is loaded on the card.

These cards work by loading them with a certain amount of money and (sometimes) paying an activation fee. They then can be used at any retailer or ecommerce site that accepts its network, like Visa, MasterCard or American Express. Prepaid cards are very easy to get — people with bad credit or no credit should have no problem applying for one — and some offer liability protection, in the event the card is stolen.

What to Watch Out For

Prepaid cards are not credit cards. This is important, because a lot of people think they’re pretty much the same thing. Prepaid cards will not help you build credit, nor do they offer the same consumer protections as credit cards, and you’re spending your own money. If you’ve loaded $100 on a prepaid card, you can spend no more than $100 until you add cash or have your paycheck directly deposited to the card.

You also may not get to use that full $100 — prepaid cards often carry various fees, including reloading fees, essentially charging you for the convenience of using plastic over cash. That doesn’t mean you shouldn’t use a prepaid card, but you should definitely read the terms of the card before using it, to make sure you don’t unwittingly lose your money to fees. (Fees vary tremendously — and a few cards don’t have them.)

If you’re interested in building credit, a secured card may be a better way to go, and you can learn more about the advantages of those cards here. Just because you don’t have a good credit history doesn’t mean you have to forgo the credit world. It’s tricky to get started or rebuild, but if improving credit is your goal, a prepaid card won’t help. You can get two of your credit scores using the free tools on Credit.com, and the snapshot of your credit history will give you an idea of what you can do in the future (i.e. opening a secured card) to make strides toward better credit health.