If you don’t have a bank account or need a new way to budget, prepaid debit cards could be the next plastic for your wallet. Here is how they work.

What is a prepaid debit card and how do I get one?

A prepaid debit card is an alternative banking product that only allows you to spend the money you load on the card. Like debit cards, prepaid cards work with any merchant that accepts their payment network, such as Visa or Mastercard. They are safer and more convenient than using cash. They are also known as stored value cards, pay-per-use cards or, more formally, general purpose reloadable prepaid cards.

You can purchase a prepaid debit card from a retailer, bank, credit card company, or other financial service provider. When you buy one, the funds on your card are usually part of an account held by a bank or credit union.

Prepaid card companies usually offer more than one way to load funds onto a card. Some cards also allow you to connect to a checking account to make online transfers.

Great for the unbanked or for budgeting

Since many prepaid debit cards do not require a credit check, they are easy to obtain. If you are in one of more than 7 million American households without access to a bank account, prepaid cards may be a solution.

Prepaid debit cards are easy to get because there is no credit check. They can also come in handy if you’re trying not to spend too much. But they have limits.

If you try to spend more than you have, most prepaid cards simply decline the transaction. They can be useful for people on fixed incomes or teenagers who receive benefits.

But prepaid debit cards have major limitations compared to bank accounts and credit cards. Although they usually offer services online, many prepaid cards do not have standard banking services, such as a way to withdraw or top up money for free. The money you load on a card probably won’t earn interest either. If you only want to load money in a safe place and don’t plan on making a lot of withdrawals, you might be better off find a high rate savings account for your funds.

Prepaid debit cards don’t affect your credit, so they won’t help build it either.

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Prepaid debit cards and credit and debit cards

Here’s a quick breakdown:

  • Prepaid debit cards – pay before: You load money onto the card by cash, check, direct deposit, or wire transfer from another account before paying for transactions.

  • Debit cards – pay now: You use money directly from a checking account when paying for purchases or withdrawing money from an ATM.

  • Credit Cards – Pay Later: You borrow money from a bank when you use the card and pay it back later.

How Prepaid Debit Cards Work

Prepaid cards vary widely, but they tend to have these characteristics in common:

Reloading options: You can usually add money to a card in a number of ways, such as setting up direct deposits, loading cash at participating retailers, and depositing checks at ATMs. Some cards also allow you to make online transfers or mobile check deposits from a smartphone.

Access to the ATM: Some prepaid cards have access to free ATM networks across the country, such as MoneyPass and Allpoint, or branded banking networks for cards issued by banks.

Fresh: You may need to pay to activate a card, make deposits, and use off-grid ATMs. There are usually monthly fees, which can sometimes be waived – by having direct deposits, for example. Some cards charge a fee for each purchase and transaction at an ATM.

Amount limits: Some cards limit the amount you can withdraw, top up, or spend during a certain period, such as a day or a month.

You may need to pay to activate a card, make deposits, and use off-grid ATMs. There is usually a monthly fee. Some cards charge a fee for each purchase and transaction at an ATM.

Protections: Reloadable prepaid cards have the liability and fraud protections required of debit cards by federal law. Some cards offer purchase protections, but it can be difficult to dispute unauthorized transactions or correct errors. A guarantee of many cards is federal deposit insurance, which means your money is covered if an issuer goes bankrupt.

Expiration dates: Prepaid cards have expiration dates. You will need to receive a new card before it expires. The funds on the cards should not expire, however. In a 2016 Consumer Financial Protection Bureau report, some consumers complained that they had money on their cards when they expired, but the issuer did not reissue cards with those balances. If this happens to you, contact the prepaid company to see if it can be resolved. Otherwise you can submit a complaint on the CFPB website.

Other characteristics: Some prepaid cards offer check writing, online bill payment, and multiple copies of a card for family members. A few even offer rewards such as cash back on purchases, similar to credit card rewards.

Limitations of prepaid debit cards

Recent Horror Stories: Several prepaid cards were affected by technology outages that lasted for days or weeks. When RushCard’s parent company changed its payment processor to Mastercard in 2015, a technology glitch locked tens of thousands of users from their RushCard accounts for days. The Walmart MoneyCard crashed in 2016. Netspend settled with a federal regulator over allegations that customers were blocked from accessing their accounts, providing refunds to those who were eligible.

No effect on credit: Since prepaid debit cards are not credit cards, you cannot create credit with them. For this you would like consider a secure credit card.

Lack of banking services: Prepaid cards also don’t automatically have all of the features you would expect with a checking account, including access to an ATM or branch network, online or mobile banking, or banking services such as wire transfers and the ability to stop payments.

If you want a checking account with no monthly fees, check out our list of best free checking accounts. There are also second chance checking accounts for people with poor banking or credit histories.

Whether used as a budgeting tool or as an alternative to banking, prepaid debit cards can help you store and spend money productively.

Know-how for budget construction

Budgeting 101: Examine your connected accounts in one place to spot your overall trends.

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