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The Points Guy believes that credit cards can transform lives, helping you leverage everyday spending for cash back or travel experiences that might otherwise be out of reach. That's why we publish a variety of editorial content and card comparisons: to help you find a great card to turn your goals into reality.
Our site may earn compensation when a customer clicks on a link, when an application is approved, or when an account is opened with our partners, and this may impact how or where these products appear. While we don't cover all available credit cards, our editorial team creates and maintains all of the analysis of these cards, and our content is not influenced nor subject to review by any credit card company, bank or partner prior to (or after) publication. Please view our advertising policy and product review methodology for more information.
Guides
A complete guide to prepaid cards
Featured image by WUTTHICHAI LUEMUANG/EYEEM/GETTY IMAGES
Chris was a reporter at The Points Guy, where he covered the intersection of credit card rewards and travel. At TPG, he wrote a broad array of stories ranging from in-depth features and reports to trending travel news as it related to loyalty, card benefits and consumer behavior.
April 27, 2020 • 7 min read
The cards we feature here are from partners who compensate us when you are approved through our site, and this may impact how or where these products appear. We don't cover all available credit cards, but our analysis, reviews, and opinions are entirely from our editorial team. Terms apply to the offers listed on this page. Please view our advertising policy and product review methodology for more information.Editorial disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
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Quick summary
Prepaid cards are payment tools preloaded with funds, functioning similarly to gift cards but accepted at most merchants where credit or debit cards are used.
They do not require a credit check or bank account, making them accessible for those without traditional banking relationships.
Open loop prepaid cards can be used broadly, while closed loop cards are limited to specific retailers.
Prepaid cards can aid in budgeting but generally do not help build credit history.
What to consider
Prepaid cards often come with various fees, such as activation, monthly maintenance and ATM withdrawal charges.
They lack the consumer protections and credit-building benefits associated with other payment methods.
Some merchants, like hotels and rental car agencies, may not accept prepaid cards for payment holds.
What you'll miss from the article
A detailed comparison of prepaid cards with alternatives like secured cards and debit cards, including guidance on choosing the right option for your financial goals.
Generated by AI with support from our editorial team.
While prepaid cards may look like credit cards and are accepted at the same retailers, they're very different. In its simplest form, prepaid cards are a method of payment preloaded with money that you use to purchase things.
Let's take a look at the different flavors of prepaid cards and everything that you need to know about how they work.
The most important thing to know about prepaid cards is that they must be loaded with funds in advance. You can't spend beyond what you load and there is no credit score or credit history attached. Unlike a regular debit card, they are not tied to a bank account. Essentially, prepaid cards function similarly to gift cards.
According to the FDIC, in 2017 there were over 14 million Americans who didn't have a bank account. If you're one of these individuals or want to avoid traditional financial institutions, prepaid cards are an easy-to-obtain option requiring no credit check. Here are a few things to keep in mind about prepaid cards:
Prepaid cards are marketed as an alternative to banks
No credit required -- but no credit is built either
Load money directly onto a prepaid card and then use that balance for purchases
How do prepaid cards work?
(Photo by Isabelle Raphael / The Points Guy)
Prepaid cards function a lot like bank debit cards. They come with a PIN and in some cases you can accept direct deposits into your prepaid account. Unlike a conventional debit card, prepaid cards are not tied to a bank account and with some prepaid cards, you have the option to reload them back up.
You can even use some prepaid cards to withdraw cash from an ATM. However, there are fees attached to this functionality.
Types of prepaid cards
Open loop prepaid cards are branded with a network such as Visa, Mastercard, American Express or Discover. You're able to use these open loop cards anywhere the brand is accepted. If a retailer normally accepts a Visa credit card, for instance, you'll be able to use your Visa prepaid card there too.
Closed loop prepaid cards are only allowed to be used at specific merchants, such as at a particular store or group of stores. These are more commonly referred to as store gift cards and are brand specific. You can only use them at specified retailers.
There are a variety of reasons why someone might use prepaid cards as a form of payment. As mentioned, you don't need to have a credit history or a bank account to use prepaid cards. Some people may purchase prepaid cards to meet minimum spending requirements and use the balance to pay future expenses. Here are some advantages to using prepaid cards:
No prior credit history needed
Anybody can “qualify” to use a prepaid card, since you're not borrowing any money and there's no credit score that needs to be verified. This is particularly attractive for people with not-so-great credit, including any young people who have not yet built up their credit history.
No bank account needed
A prepaid card can be used in lieu of a checking account at a bank or credit union. If you don't have access to a bank account, a prepaid card still allows you to pay with plastic. For some prepaid cards, you can get some banking-like features like online bill pay, mobile checking, and ATM withdrawal.
Use it (almost) anywhere a credit card is accepted
Prepaid cards can be used anywhere a credit or debit card is accepted. That includes both online purchases and in-store. However, places like rental car agencies and hotels may not accept prepaid cards as a valid hold on the payment.
It could help with budgeting
Since prepaid cards have to be preloaded with funds, it can help you avoid temptations of overspending on money that you don't have. However, be cautious of common fees associated with prepaid cards. Some prepaid cards charge a monthly maintenance fee, for example.
Gift it as an alternative to cash
Prepaid cards can be gifted to a friend or loved one, but can also be used for yourself. While a gift card itself won't earn rewards, paying for it with a credit card that earns you a bonus will.
What are disadvantages to prepaid cards?
(Photo by George Rudy / Getty Images)
There are also disadvantages to prepaid cards that should be taken into consideration.
They usually come with fees attached
If you do decide to use a prepaid card, it's important to find out what fees you will have to pay and which card has the lowest one for your needs. While the Consumer Financial Protection Bureau (CFPB) requires prepaid card issuers to provide disclosures that clearly state fees, there are often many additional expenses (activation fees, usage fees, ATM fees, etc.) that could be avoided with other forms of payment.
If you need help building credit, consider other options
Perhaps the biggest disadvantage to prepaid cards is the inability to build any form of credit. While you won't need a credit check, the downside is that spending on prepaid cards is not tracked by credit bureaus.
There are usually fewer consumer protections
Some prepaid cards will restore the original balance and issue a new card if you report loss or theft of a registered card to the issuer. However, you will not have access to the same suite of protections in the way of fraud, unauthorized charges, warranty coverage, etc.
If you are looking to build credit, a prepaid card might not be your best option. Between the fees, lack of purchase protections and inability to build credit, a proper bank-issued debit card is a much better alternative if you qualify.
And if you are able to apply for one, secured credit cards can also help build credit. These particular cards require a security deposit from the cardholder when the account is opened. This security deposit is usually refundable and determines your initial credit limit. For those without credit history or with low credit scores, secured credit cards can be useful for building or repairing credit. You’ll initially want to make modest, occasional purchases on secured cards and focus on paying off a balance in full each month.
Bottom line
There are a variety of different types of prepaid cards in the market from issuers. It pays to know the pros and cons of each, as well as your financial goals, before using it. With this guide, you'll know what to look for -- and what to avoid -- when it comes to prepaid cards.
Comments
By commenting, you agree to our Community Guidelines to help create a positive space for conversation. The responses below are not provided or commissioned by the bank advertiser, our partners, or The Points Guy (“TPG”). They have not been reviewed, approved, or otherwise endorsed by any of these parties. All responses are submitted by individual contributors, and neither the bank advertiser, our partners, nor TPG are responsible for ensuring that all posts and/or questions are answered.
