Prepaid Credit Cards vs. Debit Cards: Which One's Better for Rewards and Incentives?

Cash payments are becoming less common in many markets. In 2023, 41 percent of credit cards and 28 percent of debit cards were the most popular payment methods in the United States.

Prepaid cards are also among the payment options for consumers.

It's convenient to use these cards to pay online and in person and withdraw cash when needed. It's also often safer than stuffing your pockets with bills.

For these reasons, people are more likely to spend money when using cards this year. Around 70 percent of individuals said card payments are their most frequent choice, while 76 percent prefer businesses that accept card payments.

However, which is better for rewards and incentives: debit or prepaid cards?

But first, let's discuss how prepaid and debit cards work.

Prepaid credit cards vs. debit cards: A comparison

Here is a description about prepaid credit and debit card.

What is a prepaid card?

Prepaid cards, also called prepaid credit or debit cards, include single-use (non-reloadable) and reusable (reloadable) cards.

Single-use prepaid cards include gift cards, rebate cards, incentive cards, and promotional cards. They become useless once the balance is depleted and can only be used at one merchant (e.g., a single retail chain). You cannot use them for cash withdrawals or internationally.

Meanwhile, reusable prepaid cards allow you to load or reload money. Examples include:

• Payroll cards
• Single-purpose cards (e.g., public transit cards)
• Government-backed cards for incentives

These cards also have two types: open an closed-loop prepaid cards.

Open-loop cards are used anywhere the brand is accepted. Meanwhile, closed-loop cards can only be used at specific retailers.

In 2022, closed-loop prepaid cards had the highest market share, accounting for approximately three-fifths of the global prepaid card market revenue. 

This share is attributed to closed-loop cards’ merchant restrictions, often leading to increased usage and customer loyalty. This suggests that most people use closed-loop prepaid cards.

However, the open-loop prepaid card segment is projected to be the fastest-growing sector, accounting for a 21.3 percent compound annual growth rate (CAGR) between 2022 and 2032. 

This growth is owed to the widespread adoption of open-loop cards due to their broader usability and flexibility. They function like standard credit or debit cards, enabling online transactions and ATM withdrawals.

Steps for getting a prepaid credit card

1. Compare your prepaid card options.
2. Purchase one online or in person at a drugstore, supermarket, or big-box retailers like Target and Walmart.
3. If necessary, register the card. Your identification must be checked before loading funds or withdrawing cash for reloadable cards. You can receive your card with your name on it.
4. Load funds onto the card and start spending.

What is a debit card?

Debit cards are bank-issued cards and are linked to checking accounts. You can use them online, in-store, and overseas transactions.

Since they are linked to checking accounts, your funds come from direct deposits. You don't need to top up or reload the card because you can draw the money when needed.

Unlike credit cards with credit limits, a debit card's purchasing power is determined by your bank account balance.

Steps for getting a debit card

1. Compare banks' debit card offers and choose one with minimal fees.
2. You can create a checking account online or in person. You'll need to provide proof of identity and other required documents, such as your driver's license, Social Security number, taxpayer identification number, passport, birth certificate, and proof of address (bank statement or utility bill).
3. Request a debit card. You can receive it in person or have it delivered.
4. Once received, activate the card and start depositing or spending.

Which card is the best for you?

Now that you understand how prepaid and debit cards work, here are the advantages and disadvantages of each:

Pros and cons of prepaid cards vs. debit cards

Here are pros and cons of prepaid cards:

Pros

1. Control your spending

Prepaid cards can help control your spending because they limit your capacity to the amount you load onto the card. 

Unlike credit or debit cards, where you might exceed your budget, the loading feature of prepaid cards can prevent overspending.

Since you have a fixed amount, the money decreases as you spend and increases as you reload the prepaid card.

Let’s say you have a monthly budget of $100 for groceries and dining out. To stick to this amount, load it onto your prepaid card at the beginning of each month.

You’ll use this card exclusively for dining and groceries throughout the month. As the balance decreases, you must be more mindful of your expenses. You have a clear visual of your remaining budget, preventing you from spending more than you’ve allocated.

If you get prepaid cards for your children, you can enable parental controls to monitor the transactions.

2. No required bank account

You don't need a bank account to get a prepaid card. 

Prepaid cards are an option for people who don't have access to regular bank-issued debit cards or credit cards.

3. Multiple money-loading options

You have multiple money-loading options with a prepaid card, including:

• Cash deposits
• Checks
• Bank account transfers to prepaid cards
• Direct deposits
• Mobile app
• Reload at a store or financial institution that services prepaid cards

Cons

1. Fees

Most prepaid cards have fees, including:

• Activation fee – One-time charge for account opening, initial loading, or set-up
• Purchase fee – The upfront amount you pay to buy the card
• Reload fee – The charged amount when you reload funds onto the card
• Monthly maintenance fee – Monthly charges after you activate the card
• Inactivity or dormancy fee – You may be charged if you don't make at least one transaction within a certain period
• Customer service fee – Some issuers may require customer service fees

These fees vary widely. Some issuers don't have fees or offer ways to avoid them. For example, you can avoid the monthly maintenance fees if you maintain a sufficient balance or sign up for paycheck direct deposits.

2. It won't help build credit

Prepaid cards won't help build your credit score if you aim to establish a responsible financial management track record.

It's best to get a credit card to build your credit score.

With a credit card, your bank reports your transactions and credit utilization to the three major credit bureaus. When used responsibly, credit cards help improve your credit score.

3. Unable to spend more than the reloaded money

Some prepaid cards now have overdraft protection and fees between $10 and $25 or more. These fees can be costly and unnecessary.

Pros and cons of debit cards

Here are pros and cons of debit cards:

Pros

1. Straightforward application process

The debit card application process can be straightforward when you meet the requirements. You can apply online or in person, submit the requirements, and request a debit card.

However, the process can be challenging if you have a history of poor banking management. While banks are unlikely to check your credit when opening a checking or savings account, they could review your banking history.

The bank can decline your application if you have bounced checks and overdrafts or are reported on ChexSystems. In this case, prepaid cards may be your best option.

2. Cash withdrawals

Debit cards provide easy access to cash withdrawals through ATMs and bank branches.

This flexibility lets you convert your digital bank balance into cash when needed. As long as the ATM is within your card's network, you can withdraw funds without additional costs.

3. Discourages overspending

Like prepaid cards, debit cards help discourage overspending because your spending limit depends on your checking account balance.

If you're a young adult or new to financial management, a debit card can help you foster financial discipline and avoid credit card debt that damages your credit.

Additionally, you can access over 60,000 fee-free ATMs and monitor your expenses through real-time transaction alerts.

These perks will help you develop good financial habits. Since there are no fees to lament, you can easily manage your finances.

If you are a parent or guardian, you can also set up parental controls to monitor your children's transactions.

Moreover, tracking your spending is often more manageable because the charges reflect quickly on your account statement.

Cons

1. It won't help build credit

Standard debit cards don't help build credit because they draw money on your funds instead of a lender's credit line.

Credit involves borrowing money through loans or credit cards, which you pay back with interest.

However, there are credit-building debit cards with a line of credit backed by external bank accounts. 

In these cards, your account balance is the credit limit. After spending, the amount is deducted from your linked account.

Then, these payments are reported as repayments to the credit bureaus to build credit. Fintech companies often offer these types of debit-credit cards.

2. Transaction and overdraft fees

Although debit cards don't have annual membership and cash-advance fees, you may incur transaction and overdraft fees.

When you withdraw from out-of-network ATMs, you'll pay transaction fees.

Meanwhile, if you register for overdraft protection and overspend, your purchase will incur overdraft fees. Your issuer may freeze or close your account until you repay the balance.

Other fees you may encounter include:

• Card replacement – Fees to replace a lost, damaged, or stolen card
• Insufficient funds – Fees for rejected transactions due to insufficient funds
• Foreign transaction – Fees for transactions with foreign currencies, typically three percent of the transaction amount

3. Not the best option for significant expenses

Debit cards are excellent for small purchases but not for significant expenses. They don't facilitate large transactions you'll need to pay with a credit card or over time, such as a VA loan.

VA loans are mortgage loans designed for veterans, which can help finance your home-buying goals. 

This type of investment underscores the importance of choosing the appropriate financial tool based on short and long-term goals.

Home renovation is another expense that you should avoid using a debit card for. This project often requires substantial upfront payments for labor, materials, and contractor services, which can quickly inflate to tens of thousands of dollars.

Debit cards are impractical for such transactions because of spending limits and the need for immediate access to large amounts of cash.

Rewards Comparison: Prepaid vs. Debit

Prepaid cards often don't offer rewards like credit and debit cards.

If an issuer offers rewards, ensure you know the associated fees. These fees will likely be higher than non-rewards cards to cover the issuer's rewards program costs.

Thus, choosing a low-cost card that meets your needs without rewards might be better.

However, prepaid cards for specific purposes, e.g., travelers and employee incentives, may offer perks like cashback on specific expenses, loyalty points, and purchase protection. Additionally, they may have complex structures that vary depending on the program and spending categories.

You can even waive the monthly fee when you direct deposit $500 and above in the previous monthly period.

If you’re a business owner or employer, you can provide Xoxoday prepaid cards to your customers or employees. These cards have fee-free payouts that can scale up your rewards campaigns, employee incentives, and customer loyalty programs.

Xoxoday also has an app where prepaid card users can personalize and generate their cards. You can even use Xoxoday to reward survey and webinar participants. In 2023, G2 Crowd awarded our brand the best rewards and incentives software.

On the other hand, debit card rewards programs are designed to incentivize frequent users. These rewards are well-structured and readily available from the issuer. You can easily calculate your potential rewards based on spending habits.

Make financially smart choices

Prepaid and debit cards have their fair share of benefits and drawbacks. Whichever you choose can help you manage finances.

However, rewards and incentives vary greatly. You must assess the offers to find the perks that match your needs.

As such, understanding the terms and conditions ensures you choose the right card that aligns with your lifestyle and spending habits.