Prepaid cards vs. debit cards
A prepaid card is very different from a bank account debit card. A bank account debit card is linked to your checking account. A prepaid card is not linked to a checking account. Instead, you are spending money you loaded onto the prepaid card in advance.
In most cases, you can’t spend more money than you have already loaded onto your prepaid card. Overspending can occur with a checking account for some types of uses, and with a bank account debit card if you have “opted in” to your bank’s overdraft program. This means that your bank may charge you a fee for covering the cost of a purchase or ATM withdrawal that exceeds what you have in your account. Your bank will also require you to repay the overdraft.
In addition, right now prepaid cards may have fewer consumer protections than debit cards, such as those that apply if the card is lost, stolen, or other unauthorized charges appear. The CFPB has issued a rule requiring all prepaid cards to offer these protections.
Prepaid cards vs. credit cards
Prepaid cards are very different from credit cards. This can be confusing because both types of cards may have a card network logo like Visa, MasterCard, American Express, or Discover on them. When you use a credit card, you are borrowing money. Generally, when you use a prepaid card, you are spending money you loaded onto the card in advance.
How prepaid travel cards work
Prepaid travel cards have gained in popularity in the United States only in the past five to 10 years, though they’ve been widely used in Europe for much longer, says Brad Fauss, President and CEO of the Network Branded Prepaid Card Association (NBPCA), a prepaid card industry association.
A prepaid travel card works in a similar way to a general purpose prepaid card, except that it typically offers special features and perks designed for travel, which can vary based on the issuing bank, Fauss says.
If you have a prepaid travel card with a Visa or MasterCard logo, you’re protected by the zero liability policy from those card networks. Depending on the card issuer, you may be able to use a smartphone app or log onto a website to check the balance, review your purchases and look for charges you don’t recognize.
Getting the most out of your prepaid card
There are some prepaid cards that offer credit-building services, which will improve your credit score.
These cards charge a monthly fee that, after a certain period of time, will appear as a completed loan on your credit report, making lenders more likely to approve you for traditional forms of credit in the future.
However, it’s worth assessing whether the advantages of possessing one of these cards are worth the fees associated with them.