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How to Use a Prepaid Card

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There are various ways to pay when shopping or sending money to friends and family in the modern age. In addition to cash or credit, there is Google Pay, Apple Pay, PayPal, Venmo, and CashApp. With all of the new options, it can be easy to forget about some older payment methods. Many overlook prepaid cards, but they're an excellent way to make shopping easier and improve spending control.

How to Use a Prepaid Card

You can purchase prepaid cards in various stores and banks. While many banks offer prepaid cards, they may require you to have an established account with the bank beforehand. Many credit card companies offer prepaid cards, with some card companies specializing specifically in prepaid cards.

The first step in using a prepaid card is to load funds. Some prepaid cards can receive direct deposits so that someone can receive their paycheck directly to a prepaid card. You can load prepaid cards with transfers from bank accounts, with some cards set up so that checks can be "cashed" through the prepaid card using mobile banking apps. Some prepaid card companies have agreements with stores to allow customers to reload their cards with cash in the store if they already have the allotted money.

What Is a Prepaid Card?

A prepaid card is essentially a debit card not linked to a bank account. Unlike a credit card, the cardholder is not borrowing money. Instead, the cardholder is spending their own money. Another difference is that, unlike a debit card, the money available on a prepaid card is not stored in a bank account. Instead, a cardholder loads their prepaid card with their own money. The card company holds the money on behalf of the cardholder, and the cardholder has unlimited access to spend their funds both in-person and online using the card.

Types of Prepaid Cards

Among commercial cards, each type of prepaid card is either an opened-loop card or a closed-loop card. You can use an opened-loop card at virtually any business. These cards have a logo from one of the four major card companies (Visa, American Express, Discover, or Mastercard), so use them like any other major debit or credit card. Closed-loop cards can only be used at specific places. For example, some colleges offer closed-loop prepaid cards that can only be used on campus.

Some prepaid cards are reloadable, and others are non-reloadable. In most cases, a card that is not reloadable is a gift card. For example, there are plenty of gift cards for stores and restaurants set at $25, $50, or $100. You can use open-loop cards anywhere, but they are only intended for temporary use. A closed-loop non-reloadable card is usually a gift card for a specific store. Open-loop, reloadable cards often have more features, such as direct deposits and automatic drafts, so they're utilized similarly to a debit card.

There are also specialized prepaid cards. For example, payroll cards are used in companies that issue paychecks via prepaid cards. Some prepaid cards are referred to as government benefit cards. People without bank accounts who receive monthly payments from the government, such as SSI benefits, get their income through a special prepaid card.

How Do Prepaid Cards Work?

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Prepaid cards are loaded with money by individuals, with the amount of money entirely up to the individual who loads the card. The person who sets up the card also determines a PIN and billing address. Closed-loop cards often have fund limits and no ability to use the card online.

You can then use prepaid cards for purchases just like any other debit or credit card. Many open-loop prepaid card companies assign CVV codes and expiration dates to their cards to make it easier for cardholders to use them for online shopping. To check the card balance, a cardholder can call a phone number or website, listed on the back of the card, or read the remaining balance printed on any receipt.

Once the loaded amount is reached, the cardholder can call the card company or initiate an online transaction to reload the card. The process then starts over and repeats itself until the card's expiration date. Once the card expires, getting another prepaid card can be as simple as asking the card company for a replacement or buying a new prepaid card. (Non-reloadable cards should be destroyed after all funds are used.)

How to Get a Prepaid Card

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There are no credit checks or applications to get a prepaid card. Opened-loop credit cards are very easy to acquire. A person simply needs to order a card and load it. Depending on the company the card is from, the entire process may be completed in a retail store or bank, or the cardholder may need to order the card online. Some prepaid cards cost money to purchase. Other cards are free and just need to be loaded with funds to spend.

Closed-loop cards often come at a cost or require membership at a specific school, business, or organization. To acquire one, you need to purchase it from the applicable company or be a member of an eligible organization.

Where Can You Use a Prepaid Card?

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Opened-loop prepaid cards can be used anywhere. Even among opened-loop cards, there are some establishments that do not accept Discover or American Express, but these businesses are a minority. On the other hand, closed-loop prepaid cards can only be used in certain places, such as a specific store or in the cafeteria of a specific university.

Do Prepaid Cards Build Credit?

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Prepaid cards do not build credit. In order to build credit history, a person must take out a loan or apply for a line of credit. There is no application process for acquiring a prepaid card, and there are no loans taken since the money used belongs to the person who loads the card. Reloading the card is similar to putting money in one's own bank account. Reloading a prepaid card is not equivalent to paying off a bill, so no action from a prepaid card is reported to the credit bureaus.

Advantages and Disadvantages of Prepaid Cards

The most significant advantage of getting a prepaid card is the ability to budget. The best way to make sure that you don't overspend is not to bring more money than you plan to spend with you. Additionally, cash is easy to lose or steal. If money is stolen, it is a total loss. If a prepaid card is stolen, the cardholder can cancel the card, and the thief may not know the PIN to use the card anyhow.

Although the interest can be negligible in the average checking account, a person who has large stores of money on prepaid card balances does not earn any interest on their funds. The FDIC protection that comes along with using a debit card does not exist for a prepaid card. Unlike credit cards, prepaid cards do not build credit history. A secured card, which is a credit card similar to a prepaid card, can. Prepaid cards often have a wide variety of fees that vary from company to company, and these can make using the cards burdensome.

If a person has had financial mishaps in the past, they may be ineligible for a credit or debit card, and all of the credit checks and other roadblocks towards getting those cards do not exist to get a prepaid card. In fact, there is usually no application.

Prepaid cards are financial tools with a variety of uses. For security and budgeting, some opt to use a prepaid card while on vacation. Some parents reload prepaid cards to give kids allowance because it is easier than withdrawing cash, and it allows parents to track every purchase their child makes. In the absence of extreme fees, prepaid cards do not present a financial risk because they utilize funds that a person already has.