Although prepaid and debit cards function in similar ways, there are differences between the two and consumers should clearly understand the similarities and difference before choosing one over the other.
Before we get to the differences, let’s look at the similarities. Both cards can be used anywhere the issuer is accepted – whether Visa, American Express, Discover or MasterCard. Reload-able prepaids can also be used at ATMs to withdraw money just like debit cards. Additionally, prepaid cards can be used to shop online and pay bills (as long as they are registered), similar to debit cards. However, there are differences:
The first major difference between a prepaid and a debit card is that debit cards are linked to a bank account and draw money from that bank account to cover any charge made using the card. Prepaid cards have a pre-loaded amount and the user is able to use only the amount of money loaded on the card. Some prepaids are reload-able, which means that the user can add more money to the card after the initial amount is depleted, while others are for one time use only, meaning that once the value on the card is exhausted, the card is useless.
Another difference between the two is the issue of protection. Debit card; because they are linked to bank accounts do have some protection against fraudulent purchases. Most banks will refund money to a checking or savings account if the card was used fraudulently. While some prepaids provide this protection, it varies by issuer and mostly applies to reloadable prepaid cards.
The other difference between a debit and prepaid card is the possibility of overdraft. While almost all prepaid cards are limited to the amount of money loaded on them, and hence almost eliminates the risk of overdraft, debit cards can be overdrawn, leading to fees that can add up quickly. In some cases, banks will charge multiple overdraft fees on overdrawn transactions occurring the same day. You therefore have to keep an eye on your account to avoid getting caught up in this situation.
Finally, there is almost a 100% guaranteed approval for prepaid cards. Even with reloadable prepaids that require personal information like social security number and address, buyers are rarely denied as long as they provide the information requested. However, not all applicants are approved for bank accounts, and hence not all applicants that apply for debit cards are able to get them. That makes the reloadable prepaid cards more attractive to the unbanked or those who are unable to qualify for bank accounts.