What Does a Prepaid Card Mean and How Do They Work?
Understand prepaid cards: what they are, how they function, and how they differ from other payment methods.
Prepaid cards function as a payment method operating on money loaded onto the card in advance. They enable spending without being tied to a bank account or a line of credit. A prepaid card allows access to funds already made available, rather than borrowed money, helping users control spending by limiting transactions to the pre-loaded amount.
How Prepaid Cards Function
Prepaid cards operate by allowing users to load funds through various methods. Common ways to add money include direct deposit of paychecks or government benefits, cash reloads at retail locations, or transfers from a bank account. Some cards also support mobile check deposits. Once loaded, the card can be used for purchases online, in person, or over the phone, similar to debit or credit cards.
When a purchase is made, the amount is deducted directly from the card’s available balance. Users can check their card balance through online portals, mobile applications, or by calling customer service. Prepaid cards often come with various fees, including activation, monthly maintenance, or ATM withdrawal charges. Fees may also apply for cash reloads or paper statements.
Common Types and Applications
Prepaid cards come in several common types. General-purpose reloadable (GPR) cards function like a debit card and are accepted wherever major card networks are. These cards can be reloaded multiple times, making them suitable for everyday spending and budgeting.
Gift cards are preloaded with a set amount, typically used for purchases at specific retailers or across a broader network. Travel cards are designed for international use, allowing users to load multiple currencies and offering competitive exchange rates to reduce foreign transaction fees. They provide a secure alternative to carrying cash. Payroll cards are issued by employers to distribute wages, enabling employees to access funds, make purchases, and pay bills.
Distinguishing Prepaid Cards from Other Payment Cards
Prepaid cards differ from both debit and credit cards. Unlike debit cards, which are linked to a bank account, prepaid cards are not connected to one. Funds are drawn directly from the pre-loaded money, rather than from an account balance.
Compared to credit cards, prepaid cards do not involve borrowing money. Users cannot incur debt or build a credit history because they spend only the funds already loaded onto the card. Prepaid cards do not require a credit check for activation, making them accessible regardless of an individual’s credit score. Once the pre-loaded balance is depleted, the card cannot be used until more funds are added, preventing overspending or overdrafts.