What Is A Prepaid Debit Card?

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It is issued by banks and backed by credit card companies like VISA, MasterCard, and American Express and can sometimes offer rewards and benefits similar to credit cards. Usually, these cards are for specific purposes, like an employee using their company’s prepaid card to use the services in the cafeteria. It acts as an alternative to cash.

Key Takeaways

  • Prepaid debit cards are alternative forms of making payments. They are not connected to a bank account but to the amount loaded into the card’s balance.It is an efficient way to eliminate overspending and help the cardholder stick to a budget.The charges for a card of this nature include ATM charges, loading and reloading charges, and monthly fees, among others.Also referred to as pay-as-you-go cards, they can act as a viable alternative to carrying paper cash. They sometimes also provide additional rewards like conventional credit cards.

How Does A Prepaid Debit Card Work?

Prepaid debit cards, or pay-as-you-go cards, is an efficient alternative to carrying a ward of cash. These cards are not connected to a line of credit like credit cards or a bank account like conventional debit cards. Instead, they are connected to the amount deposited into the card’s balance.

When an individual purchases a prepaid card, it comes with a particular value of funds. Once it is depleted or spent, the card owner can reload the card with funds. Reloadable prepaid debit cards come with various options regarding how the funds can be deposited into the card’s balance; the options include an online transfer from the bank, direct deposit, or through a retail store that accepts cash and deposits money digitally to the card.

However, it is vital to understand the fees involved in reloading funds as companies usually levy a charge every time a reload of funds is made. Hence, it might be helpful to plan expenses and reload diligently to reduce the costs involved.

Once the funds are loaded into the card’s balance, it works just as well as any other credit or debit card to make payments. However, if the card is loaded for $200, the cardholder can only carry out expenses beyond $200 after reloading funds into the account.

Nonetheless, it is crucial to understand the fees and other charges involved in using a prepaid card, such as opening, ATM, reloading, monthly, and overseas transaction fees. A few companies, however, offer a no fees prepaid debit card, which eliminates most of these extra costs or in combinations.

Types

The types of pay-as-you-go cards include:

  • Open-Loop Card: These cards can be used at most stores and come with the network’s logo.Closed-Loop Card: A closed-loop card can only be used at certain places and usually does not have a network logo—for example, universities issue cards for their students for purchases within the premises.Non-Reloadable Card: The card owner cannot reload money into the card once the funds are exhausted. Travelers on a budget usually use this.Reloadable Card: Usually referred to as a general-purpose reloadable card, it allows its owners or cardholders to reload cash into the card balance after exhaustion.Gift Card: Issued by banks or even gifted by friends & family as an alternative to cash to purchase at a store.Payroll Card: Employers use this card to reimburse employees at the end of every month.

Examples

Let us understand the functions of a pay-as-you-go card with the help of the examples below:

Example #1

Allan’s son Donald recently moved out to a new location for his college. Allan wanted to ensure his son’s expense patterns remained consistent. Donald had spent over $2,000 in the last month, roughly $500 above his monthly allowance through his debit card.

To ensure his son learned the value of money and spent thoughtfully, he subscribed Donald to a pay-as-you-go card and remained the deciding authority on the limits of the card’s balance.

The limit was set to $1,500, and it showed results almost instantaneously. The fact that Donald was aware of the balance on his card helped him manage his expenses and spent only 3/4th of his monthly allowance giving room for a bit of investment.

Example #2

In November 2022, the supermarket chain Giant Food introduced prepaid cards for their members to create a community and tackle the insecurity relating to the food industry.

They teamed up with a Boston-based company called About Fresh. This collaboration allowed the customers to purchase customized healthy food prescribed by a healthcare professional. Additionally, the subscribers of this program can avail of benefits such as free consultations, classes, and other resources.

Benefits

Using a pay-as-you-go card can help its owner with multiple things. First, anyone can easily acquire it is a big plus compared to a credit card, where credit history, monthly income, and expenses are scrutinized before issuing a card. Let us understand the benefits of using these types of cards through the points below:

  • For any individual who wants to curb their erratic spending patterns or has issues with managing a credit card or their overall budget management, a prepaid card can come in handy to help them manage their expenses.Parents or guardians who want to keep an eye on their children’s spending can choose to remain the deciding authority on the limits of the card’s balance.It is not dependent on a bank account or a line of credit. Therefore, acquiring, managing, and spending through a prepaid card is easy.The usage of such cards is as simple as any other card and can be swiped or used for online transactions. However, most e-commerce websites restrict users from combining a prepaid card with any other card for the same transaction.As an alternative for spending, it is safer than carrying paper cash in a wallet. Moreover, users are protected in case of theft or loss of cards, especially while traveling. Individuals can choose a virtual prepaid debit card that cardholders can operate from an app or a website on their mobile phones.The security of prepaid cards is at par with other cards linked to a bank or a credit card company. Often, these cards are issued by banks, adding a layer of security.Businesses that use prepaid cards can ensure a hike in their repeat customers, thereby improving customer loyalty.

Prepaid Debit Card vs Prepaid Credit Card vs Gift Card

Let us look at the differences between prepaid debit cards and prepaid credit cards and gift cards:

This article has been a guide to Prepaid Debit Card and its meaning. We explain its types, examples, benefits, and comparisons with credit and gift cards. You may also find some useful articles here –

They are issued by banks and are branded and backed by major credit card companies like American Express, Visa, and MasterCard. The process is like procuring any other card, but it is important to note that prepaid cards are not connected to the bank account; they are connected to the amount separately deposited into the card’s balance.

Once the funds are deposited into the card, cardholders can use them like any other debit or credit card. Cash withdrawals, online payments, or swiping at a store are possible without a bank account.

The cost of purchasing a prepaid card can vary from carrier to carrier. At the same time, individuals can procure most prepaid cards for between $1-$6. However, some companies offer a no-fee prepaid card that one might consider buying.

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