What are the downsides of using a prepaid card?
Learning about prepaid cards can help you decide if they’re right for you.
Prepaid cards look like a debit or credit card, but they require you to load money onto them before you can use them.
You may find them beneficial if you need some help in controlling spending, setting a budget, or paying for things online if you don’t have a bank account.
It may be helpful to understand the downsides of prepaid cards, which include higher fees, lack of acceptance with some merchants like hotels, and limited protection from fraud.
What is a prepaid card?
A prepaid card looks like a debit or credit card, but it works a bit differently. A prepaid card has a specific amount of money, or value, and can usually be reloaded when the money is spent.
How prepaid cards work
You choose an amount to put on the card — say, $100. Then you use the card (often like you would a credit or debit card) to pay for goods or services until that $100 is spent.
Common uses for prepaid cards
Budgeting
A tool to control spending
Buying items online
To receive a paycheck or other income and benefits
As an alternative if you don’t have a bank account
Keep in mind that while prepaid cards can be useful, they are not exactly the same as a debit or a credit ca
Major downsides of using a prepaid card
Fees
Prepaid cards tend to come with multiple fees. Even though some of the fees may be small, they can quickly add up and drain the card’s balance. Here are some fees you can expect to pay:
Monthly maintenance fees
Reload fees
ATM withdrawal fees
Balance inquiry fees
Inactivity fees
Card replacement fees
Limited consumer protections
Fraud protections on prepaid cards may differ from those on traditional debit or credit cards, especially if the card is not registered. Coverage can vary by issuer.
No credit-building benefits
Prepaid cards don’t report to credit bureaus, so they don’t help build or improve credit.
Limited acceptance and functionality
Not every business can or will accept prepaid cards, so there are several restrictions tied to them. Businesses may block them because it can be harder to verify the cardholder information and prepaid cards may have more processing fees.
Hotels and car rental companies generally don’t take prepaid cards because there’s no way to pre-authorize deposits or ensure the card has enough money to cover the entire bill. And using the card with a subscription service can be problematic if the card runs out of funds and doesn’t get reloaded in time.
No interest or growth
Most prepaid cards do not earn interest and are not designed as savings or investment tools.
Downsides compared to other payment options
Prepaid card vs. debit card
Prepaid cards often come with additional fees. Fraud protections may also be more limited than those on traditional debit cards, depending on the card issuer and registration status. Some prepaid cards are issued by FDIC-insured banks and may offer pass-through FDIC insurance, while others may not. Coverage depends on how the card is structured and whether it’s registered.
Prepaid card vs. credit card
In addition to higher fees and less fraud protection, prepaid cards don’t offer rewards like a credit card might. Unlike credit cards, prepaid cards don’t contribute to your credit score and often can’t be used to book a hotel or rental car.
Prepaid card vs. cash
Acceptance can vary. While cash is widely accepted in person, it cannot be used for online purchases. Prepaid card acceptance depends on the card network and merchant policies.
Hidden or overlooked risks of prepaid cards
Fee transparency issues
The variety of fees can add up quickly, and it’s not always easy to calculate what fees you’ll pay.
Difficulty recovering funds
It can be difficult to spend the entire amount of a prepaid card due to merchant acceptance rules, so you may be left with a small balance on the card.
Customer service limitations
If you have issues with the card, customer service may not always be able to help, and there’s typically no local office or branch to offer in-person help.
When a prepaid card might still make sense
Short-term budgeting tool
For people getting started with budgeting, prepaid cards can be helpful by preventing overspending.
Temporary banking alternative
If you’re opening a new bank account but don’t yet have a debit card, prepaid cards may be a good solution while you wait for your new card.
Teaching financial basics
Prepaid cards can be tools for teaching basic financial skills like budgeting and managing money.
Better alternatives to prepaid cards
Free or low-cost checking accounts
Many banks offer checking accounts and debit cards without fees or with low fees.
Secured credit cards
You load money onto a secured card (similar to a prepaid card). But you’ll receive a bill and will need to make a payment. That payment information then gets reported to the credit bureaus.
Cash and budgeting apps
Cash generally prevents overspending and is accepted by most merchants. Mobile payment apps like Venmo or Zelle typically allow you to deposit money into your account and spend money at merchants that take the apps as a form of payment.
How to minimize prepaid card downsides
If you want to get a prepaid card, there are a few things to do that may minimize its downside:
Choose low-fee cards carefully
Comparing fee schedules and features can provide clarity before choosing a prepaid card. For instance, some cards have foreign transaction fees, which may not be helpful if you plan to use the card outside of the U.S.
Avoid ATM and reload fees
Some prepaid cards charge ATM or reload fees, so reviewing fee schedules of various cards can help you understand their total cost.
Monitor balance and activity
Monitoring balances and transactions can help identify unexpected charges.
Bottom line
Prepaid cards look and feel like a credit or debit card, but you’ll need to load cash onto them before you can use them. You may want to take time to explore their risks and alternative options like debit cards or credit cards before deciding if prepaid cards are right for you.
Though Raisin doesn’t offer prepaid cards, it can give you access to a marketplace of high-yield savings products that may support your financial goals. Comparing savings products can help you work toward those goals.
Frequently asked questions
They’re not necessarily bad, but it is helpful to understand the risks and downsides of prepaid cards before deciding to use them.
Some merchants may not accept them, especially for hotel bookings that require a pre-authorized deposit that may exceed the card’s balance.
Prepaid cards may offer certain protections, such as the ability to cancel the card if it’s lost or stolen. However, protections vary by issuer and registration status.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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