Key takeaways
- The primary difference between debit cards and prepaid cards comes down to where the money is housed.
- With debit cards, money is contained within a linked bank account. Prepaid cards, on the other hand, draw on money you’ve loaded directly onto the card.
- Prepaid cards and debit cards aren’t forms of credit, which means they can’t help you build or rebuild your credit score.
- Neither card offers the same fraud protection you’ll find with credit cards.
While prepaid cards and debit cards share a number of characteristics, understanding exactly how they’re different can help you make the wisest decision for your needs. Both types of cards offer the convenience and security of electronic, non-cash payments as well as opportunities to help you budget. However, neither can help you build up credit or stay protected against fraud to the degree that a traditional credit card can.
Comparing debit cards vs. prepaid cards
| Debit card | Prepaid card | |
|---|---|---|
| Worldwide acceptance | Yes | Yes |
| Builds credit | No | No |
| How its funded | Linked checking or savings account | Money is loaded onto the card via electronic deposit or a cash reload at a participating retailer |
| Annual or monthly fees | No (But some banks have checking account fees) |
Yes |
| Other common fees |
|
|
What is a debit card?
Debit cards are the first form of card payment many people encounter because they often come with your checking account. According to the Federal Reserve’s most recent data, debit cards continue to be the most frequently used form of payment — used about 41 percent more often than credit cards and about 127 percent more often than prepaid cards. However, credit cards were used slightly more often by the average person and overall between 2022 and 2023.
Traditional debit cards are issued by financial institutions and draw on money in a linked checking or savings account. Unlike a traditional credit card, which acts as a short-term loan until your statement is due, a debit card only allows you to make purchases up to the money you already have in your account. If you go over that amount, you could be on the hook for overdraft or insufficient funds fees. You’ll definitely want to avoid these since Bankrate’s 2024 checking account and ATM fee study found the average overdraft fee rose to about $27 in 2024. On the bright side, the average insufficient funds fee dropped 11 percent from 2023 to 2024, but this sizable fee still weighed in at almost $18.
How a debit card works
You fund a debit card by making deposits into your linked checking or savings account. You can make deposits via direct or other electronic funds transfer or with a cash deposit at your bank or ATM.
Debit cards run through the same networks as credit cards, primarily Visa and Mastercard, which means you can use a debit card with any merchant around the world that accepts those types of cards. When you swipe, tap or insert your debit card, the cost of your purchase is deducted directly from your associated account.
Pros and cons of debit cards
Pros
- Access at young age. You may have gotten your first debit card before 18, when you opened a bank account with a relatively low amount of money. Debit cards are less complicated, and can be easier for younger people to obtain and get experience with than fee-riddled prepaid cards or higher-stakes credit cards as an authorized user.
- Convenience. Debit cards offer convenience and security that carrying around cash doesn’t. Plus, debit cards can be used online, with peer-to-peer payment apps and with merchants that don’t accept physical cash.
- Little to no fees. Debit cards typically don’t charge annual fees or fees for actions that prepaid cards often do, and associated checking accounts also rarely charge fees.
- Easy option to learn money management. Because they’re connected to money you already have in your account, you can’t spend more than you have. If you do happen to go over your existing balance, the fees and penalties associated with overdrafting your account or having a payment returned for insufficient funds will likely sting enough to teach you a lesson in budgeting for next time. Unlike credit cards, debit cards protect you from spending wildly more than what you can afford, helping you to avoid the hefty interest charges that can rack up on that overspend.
Cons
- Won’t help you build credit. Debit cards aren’t loan products and therefore can’t help you build a credit history or score. To build a credit score, you need to show a history of owing money and paying it back responsibly, which debit cards can’t provide since they pull from your own money.
- You may not qualify. It’s unlikely a bank will check your credit as a prerequisite to opening a checking or savings account, but they can look at your banking history. If you have a history of bounced checks or overdrafts, a bank could decline to open an account for you. In that case, a prepaid card may be your best option.
- Account fees. Debit cards themselves rarely charge fees, but there could be fees associated with the checking or savings account linked to the debit card. Fortunately, you can often avoid banking fees.
- Limited fraud protection. Credit cards enjoy more account protections than debit cards, which makes debit cards riskier if your information is stolen from bad actors online or through card skimmers. This also means you could lose more money from unauthorized purchases — especially since issuers may be more keen to recover the money if it’s theirs.
Who should use a debit card?
A debit card can be a convenient tool for people looking to avoid the temptation of traditional credit cards, and you likely already have one if you’ve opened a checking or savings account.
If you ever need to withdraw money from an ATM, using your debit card at an in-network ATM can mean avoiding ATM fees — or, worse, cash advance fees on a credit card. Some merchants also don’t accept credit card-focused networks like American Express, charge a fee for credit card payments or don’t accept credit cards at all.
What is a prepaid card?
Prepaid cards — also called stored-value cards — offer another means of non-cash payment. Like debit cards, prepaid cards draw from available funds and can help you effectively stay within your budget. Unlike debit cards, you don’t need a bank account to use them, making them a secure non-cash payment option for the 5.9 million households in the U.S. without access to a bank account.
In some ways, prepaid cards more closely resemble gift cards than debit cards. That’s because a prepaid card isn’t connected to any account; instead, it’s loaded with a set amount of money, and you can only spend up to the amount you’ve preloaded onto the card. As with a gift card, you can load more money onto the card to continue using it to pay for goods and services.
How a prepaid card works
Unlike debit cards, which are issued by a financial institution when you open an eligible account, you can purchase prepaid debit cards from retailers, banks and other financial services providers. You can even buy them online.
When you purchase a prepaid card, the purchase price effectively loads a balance on the card. To use the card, you may also pay an activation fee and other fees, including monthly maintenance fees.
Once loaded, you can use a prepaid card to make purchases at any store or merchant that accepts the card’s network, such as Visa or Mastercard. As with a gift card, if you try to make a purchase for more than the funds available on the card, the purchase will be declined.
You can usually reload the prepaid card in a variety of ways, including setting up direct deposits, loading cash at participating retailers or making deposits at an ATM.
Pros and cons of prepaid cards
Pros
- Accessible card options. Prepaid cards offer convenience and security to people who may not have access to traditional debit or credit card products.
- Isolated funds from your other accounts. Prepaid cards have protections that are similar to debit cards. They’re protected against liability and fraud by federal law and, in some cases, may even be FDIC-insured for up to $250,000, depending on the card. However, a key benefit behind prepaid cards is that the merchant (and any fraudsters) can only access the funds that have been loaded onto the card — not your full credit line or checking account balance.
- Budgeting support. Another important benefit is that prepaid cards can help with budgeting and controlling your spending. You can only spend what you have loaded on the card, protecting you from overspending and racking up interest charges or debt.
Cons
- Numerous fees. Most prepaid cards charge costly fees that can include a transaction fee for every time you use the card. Other fees to look out for include annual or monthly maintenance fees, cash reload fees, inactivity fees, foreign transaction fees, balance inquiry fees and more.
- Won’t help build credit. Like debit cards, prepaid cards aren’t credit products and therefore can’t help you establish a credit history. Consider applying for a secured credit card if you’re looking for a non-cash product that can help build your credit.
- Expiration dates. The funds loaded onto the card won’t expire, but the card itself could. In some cases, you’re charged a fee for replacing the expired card.
- Daily purchase limits. Some prepaid cards limit how much you can spend on the card at one time or daily.
- Funds reloading limitations. Unlike debit cards that allow you to make cash or check deposits to your account, the reloading options for a prepaid card may be limited to electronic means or a direct deposit.
- Fees for cash withdrawals. Debit cards often allow you to withdraw cash without a fee from an in-network ATM or even request cash back when you make a purchase at an eligible retailer. Prepaid cards offer far fewer ATM options, and you’ll usually pay a fee if you do choose to make a withdrawal. Cash back at a retailer’s point-of-sale is unlikely to be an option with a prepaid card.
- Less mobile app support. Mobile banking is convenient. With a debit card, you can usually check your balance, deposit checks and move money on your phone. Prepaid cards usually lack these types of mobile and online features.
Who should use a prepaid card?
Prepaid cards are good options for people who don’t have access to a bank account. They can also come in handy for people who are on strict budgets or learning how to manage money responsibly.
The bottom line
Debit cards offer far more advantages than prepaid cards, but they may not be easily accessible for some. Prepaid cards can be good alternatives if you don’t have access to a bank account or want to be held to a strict budget. However, the laundry list of fees can be costly if you’re looking for a digital payment option or a non-cash method for accessing your own money.
A credit card would be worth it if you’re trying to build credit or you want a more secure payment method, but a debit card would likely be better than a prepaid card in many cases if you’re able to establish a bank account.
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