Debit Card vs. Prepaid Card: Which Credit Card Alternative Is Better for You?
Most banks nowadays offer credit, debit, and prepaid cards, but few consumers know what they sign up for. While all types of cards can be used for both online and offline shopping, they serve different purposes.
When weighing up a debit card vs. a prepaid card, it's important to consider the bank fees. Think about how you're planning to use the card, too. Neither card can help you build or improve your credit score, but using them can make budgeting easier.
Interested to find out more? Here's what you should know about these popular credit card alternatives and how they differ from each other.
What Is a Debit Card?
American banks and other financial institutions issue 165 million debit cards annually. Most consumers use their debit cards when shopping at supermarkets, gas stations, or restaurants.
But what is a debit card and why should you get one?
This type of payment card is linked to a consumer's checking account. Therefore, it eliminates the need to issue checks and pay in cash.
Some debit cards are free of charge, while others carry monthly maintenance fees. Most of them have daily purchase limits and require entering a security code (PIN) to access the money in your checking account.
With a debit card, you can only use the money you have in your bank account. Credit cards, on the other hand, allow you to borrow money from the bank. Both types of cards can be used to make purchases, transfer money, and withdraw cash from ATMs.
How Does a Prepaid Card Work?
Unlike debit and credit cards, prepaid cards are not linked to a bank account. These can be payroll cards, gift cards, or even phone cards.
Prepaid cards typically don't offer cash back or bonus points. Some have a maximum value, while others can be loaded with funds.
Gift cards, for example, may have a maximum value of $100, $300, or $500. Other types of prepaid cards, such as those issued by financial institutions, are often reloadable.
Debit Card vs. Prepaid Card: Make an Informed Decision
Debit cards usually offer more flexibility and carry lower fees than prepaid cards.
The primary difference between the two is that prepaid cards are pre-loaded with funds, while debit cards are not.
Also, note that some debit card issuers offer overdraft protection. This means that they'll allow a transaction to go through even if you don't have enough money in your checking account. That's not the case with prepaid cards.
The downside of overdraft protection is that it can lead to overspending. Plus, you may end up paying hefty fees each time you use this service. In 2020, the average overdraft fee was $33.47.
If you're trying to make savings, think twice before enrolling in overdraft protection. While this service has its perks, it may not be worth the price.
All in all, prepaid cards are often a better choice than debit cards when it comes to managing your money. But debit cards can be a smart choice, too—depending on how you plan to use them.
Know Your Options
Both prepaid and debit cards eliminate the need to carry money around. You may use them to buy groceries, pay the bills, and manage your finances. Choosing one over the other depends on your needs.
Consider your financial goals and spending habits when weighing up a debit card vs. a prepaid card. Compare multiple card issuers so you can make an informed decision.
Meanwhile, sign up for a Connect account to get your alternative credit report!