Prepaid cards vs. debit cards

While prepaid cards and debit cards share a number of characteristics, understanding exactly how they’re different can help you make the wisest decision for your needs. Both cards offer the convenience and security of electronic, non-cash payments as well as opportunities to help you budget, but neither can help you build or rebuild your credit or offer you the same security against fraud offered by a traditional credit card.

Let’s compare the accessibility, features and fees of these popular payment options.

Side-by-side comparison of key debit card and prepaid card features

What is a debit card?

Debit cards are the first form of card payment many people encounter because they often come with your first bank accounts. Nearly 30 percent of payments in the U.S. were made with debit cards in 2022, according to Federal Reserve data. Only credit cards, at 31 percent, were a more popular payment choice.

Traditional debit cards are issued by financial institutions and draw on money in a linked checking or savings account. Unlike a traditional credit card, which acts as a short-term loan until your statement is due, a debit card only allows you to make purchases up to the money you already have in your account. If you go over that amount, you could be on the hook for overdraft or insufficient funds fees.

How a debit card works

You fund a debit card by making deposits into your linked checking or savings account. You can make deposits via direct or other electronic funds transfer or with a cash deposit at your bank or ATM.

Debit cards run through the same networks as credit cards, primarily Visa and Mastercard, which means you can use a debit card with any merchant around the world that accepts those types of cards. When you swipe, tap or insert your debit card, the cost of your purchase is deducted directly from your associated account.

Benefits of debit cards

You may have gotten your first debit card as a teenager, when you opened a bank account for your babysitting money. Debit cards offer convenience and security that carrying around cash doesn’t, and they typically charge fewer fees than prepaid cards do.

Debit cards can also help you learn how to manage your money. Because they’re connected to money you already have in your account, you can’t spend more than you have. If you do happen to go over your existing balance, the fees and penalties associated with overdrafting your account or having a payment returned for insufficient funds will likely sting enough to teach you a lesson in budgeting for next time.

Unlike credit cards, debit cards protect you from spending wildly more than what you can afford, helping you to avoid the hefty interest charges that can rack up on that overspend.

Downsides of debit cards

• Won’t help you build credit. Debit cards aren’t loan products and therefore can’t help you build a credit history or score. To build a credit score, you need to show a history of owing money and paying it back responsibly, which debit cards won’t allow you to do.
• You may not qualify. It’s unlikely a bank will check your credit as a prerequisite to opening a checking or savings account, but it could look at your banking history. If you have a history of bounced checks or overdrafts — or your name appears in the specialty consumer ratings ChexSystems — a bank could decline to open an account for you. In that case, a prepaid card may be your best option.
• Account fees. Debit cards themselves rarely charge fees, but there could be fees associated with the checking or savings account linked to the debit card — though you can often avoid banking fees.

Who should use a debit card?

A debit card can be a convenient tool for people looking to avoid the temptation of traditional credit cards, and you likely already have one if you’ve opened a checking or savings account.

If you ever need to withdraw money from an ATM, using your debit card at an in-network ATM can mean avoiding ATM fees — or, worst, cash advance fees on a credit card.

A debit card could also work well for parents wanting to give their kids money to spend and manage each week.

What is a prepaid card?

Prepaid cards — also called stored-value cards — offer another means of non-cash payment. Like debit cards, prepaid cards draw from available funds and can help you effectively stay within your budget. Unlike debit cards, you don’t need a bank account to use them, making them a secure non-cash payment option for the 5.9 million households in the U.S. without access to a bank account.

In some ways, prepaid cards more closely resemble gift cards than debit cards. That’s because a prepaid card isn’t connected to any account; instead, it’s loaded with a set amount of money, and you can only make purchases on the card up to the amount you’ve preloaded onto the card. As with a gift card, you can load more money onto the card to continue using it to pay for goods and services.

How a prepaid card works

Unlike debit cards, which are issued by a financial institution when you open an eligible account, you can purchase prepaid debit cards from retailers, banks and other financial services providers. You can even buy them online.

When you purchase a prepaid card, the purchase price effectively loads a balance on the card. To use the card, you may also pay an activation fee and other fees, including monthly maintenance fees.

Once loaded, you can use a prepaid card to make purchases at any store or merchant that accepts the card’s network, such as Visa or Mastercard. As with a gift card, if you try to make a purchase for more than the funds available on the card, the purchase will be declined.

You can usually reload the prepaid card in a variety of ways, including setting up direct deposits, loading cash at participating retailers or making deposits at an ATM.

Benefits of prepaid cards

Prepaid cards offer convenience and security to people who may not have access to traditional debit or credit card products. They are protected against liability and fraud by federal law and, in some cases, and may even be FDIC insured for up to $250,000, depending on the card.

Another important benefit is that prepaid cards can help with budgeting and controlling your spending. You can only spend what you have loaded on the card, protecting you from overspending and racking up interest charges or debt.

Downsides of prepaid cards

• Numerous fees. Most prepaid cards charge costly fees that can include a transaction fee for every time you use the card. Other fees to look out for include annual or monthly maintenance fees, cash reload fees, inactivity fees, foreign transaction fees, balance inquiry fees and more.
• Won’t help build credit. Like debit cards, prepaid cards aren’t credit products and therefore can’t help you establish a credit history. Consider applying for a secured credit card if you’re looking for a non-cash product that can help build your credit.
• Expiration dates. The funds loaded onto the card won’t expire, but the card itself could. In some cases, you’re charged a fee for replacing the expired card.
• Daily purchase limits. Some prepaid cards limit how much you can spend on the card at one time or daily.
• Funds reloading limitations. Unlike debit cards that allow you to make cash or check deposits to your account, the reloading options for a prepaid card may be limited to electronic means or a direct deposit.
• Fees for cash withdrawals. Debit cards often allow you to withdraw cash without a fee from an in-network ATM or even request cash back when you make a purchase at an eligible retailer. Prepaid cards offer far fewer ATM options, and you’ll usually pay a fee if you do choose to make a withdrawal. Cash back at a retailer’s point-of-sale is unlikely to be an option with a prepaid card.
• Less mobile app support. Mobile banking is convenient. With a debit card, you can usually check your balance, deposit checks and move money on your phone. Prepaid cards usually lack these types of mobile and online features.

Who should use a prepaid card?

Prepaid cards are good options for people who don’t have access to a bank account. They can also come in handy for people who are on strict budgets or learning how to manage money responsibly.

The bottom line

Debit cards offer far more advantages than prepaid cards, but they aren’t available for everyone. Prepaid cards can be good alternatives if you don’t have access to a bank account or want to be held to a strict budget. Just don’t let the many common prepaid card fees catch you off guard.

Neither card type will help you build your credit, but both can provide the convenience and security of non-cash payments. Compare the top prepaid debit cards on the market — and carefully read the fine print before making your decision.