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How do prepaid cards work?

What exactly does a prepaid card do?

Are they equal to or better than a debit or a credit card?

These are some of the questions you may be wondering if you happen to buy a prepaid card or if you are offered one from your employer. Prepaid cards make for a perfect gift and are often used by employers as a reward for recognition of good work, exceeding targets, or exemplary performance. 

Since prepaid cards are easy to buy and gift to others, their popularity is growing daily. Many companies and brands have taken up personalized and custom prepaid cards that are often provided to clients to shop at their store or their websites.

In this article, we will explain their benefits and features and how to use them in the best way possible. 

What are prepaid cards? 

A prepaid card is a type of card that allows you to spend money that you've loaded onto the card in advance. Unlike a debit card, which is linked to a checking account, or a credit card, which provides a line of credit, a prepaid card has a value that is set by the amount of money you deposit onto it.

Once you've spent the preloaded amount, the card cannot be used until it's reloaded with more funds.

Key features of prepaid cards:

  1. No credit check required: Since you're using your own money and not borrowing, there's no credit check involved in obtaining a prepaid card.
  2. Limited risk: If lost or stolen, you're only at risk for the amount loaded onto the card, making it a safer alternative to carrying cash.
  3. Versatility: Prepaid cards are often branded with major card network logos (like Visa, MasterCard, or American Express) and can be used anywhere those cards are accepted.
  4. Online shopping: Just like debit or credit cards, prepaid cards can often be used for online purchases.
  5. Budgeting tool: For individuals wary of overspending or accumulating credit card debt, prepaid cards can serve as an effective budgeting tool. Since users can only spend what's loaded, it limits impulse purchases.
  6. Fees: It's essential to be aware that many prepaid cards come with various fees, such as monthly fees, ATM withdrawal fees, or reload fees.

These prepaid cards are easy to acquire and can be loaded with a certain amount of money, making buying things and spending for utilities easier. With a prepaid card, you do not have to worry about carrying cash or relying on credit that may accrue interest.

Prepaid cards give you the freedom to pay as you go. Where debit cards require you to have money in your bank account and where credit cards require you to lend money from a bank and can end up costing you interest when not paid on time, prepaid cards give you the freedom of paying with the money you already have loaded on the card. Ergo, you can pay for things without actually having physical money or a bank account. 

How do prepaid cards work: A step-by-step guide 

Getting a prepaid card is not a long or difficult process. One of the most significant advantages of using a prepaid card is the wide availability of these cards and their ease of purchase. Most cards can be bought online or from retail stores and loaded up as you go. 

1. The process of obtaining a prepaid card

You can buy a prepaid card online from a website, a gifting site, or a branded retail store. 

  • Application and approval: They can be applied online and do not have a meticulous approval procedure as the money is loaded on the card either online or purchased directly from a shop. 
  • Card activation: Once the card is received, you can start using the cards by either activating them online at the website that has issued the card or at a retail store where the card is accepted. 

2. Funding a prepaid card

Most cards are bought for a particular denomination, such as 100 USD or 200 USD. Usually, these can be used to their limit and reloaded with more cash.

Reloading is like purchasing an item via Internet shopping by entering the card details and adding a certain amount to the card using Internet banking or direct debit from a card. 

Not all cards can be reloaded with more money. Make a note of the card type and read the instructions with the card to know more about reload facilities. 

3. Making purchases with a prepaid card

Purchasing prepaid cards is just like shopping with a debit card, but unlike debit or credit cards, you are paying for money you already have loaded on the card. Money is not further deducted from your bank account or added to your credit card bill. 

  • ATM withdrawals and cash access: Prepaid cards also help you withdraw cash from an ATM, giving you unparalleled access to cash from anywhere and at any time. You can easily use your prepaid card to withdraw funds from ATM machines or even from physical retail stores. 

Benefits of prepaid cards 

One of the most significant advantages of using a prepaid card is the idea that you no longer need to carry physical cash or a bank account to purchase and shop for things.

It is great for gifting as you provide your loved ones an opportunity to buy anything with the card without having to send them money or disclose bank account details. Some of the other benefits of prepaid cards are:

1. Financial management

Prepaid cards are an excellent way to cut down on excessive spending. Since you are spending only a certain amount that you already have paid for and not depending on a credit card or an overdraft facility, you are consciously avoiding overspending. 

2. Security features

Prepaid cards are loaded with security features that help keep your money safe. Only with the right details and authentication can a prepaid card be used both in-store and online. The money loaded on the card is also safe and cannot be hacked into. 

3. No bank account needed

As mentioned earlier, the best part of having a prepaid card is the independence from a bank account. If you are someone who does not have a bank account or if you need to gift someone without disclosing bank account details, prepaid cards are the way to go. 

3. Online and international transactions

It is super easy and convenient to use prepaid cards for shopping online and to pay for utilities using internet payment. International transactions need to be availed using special prepaid cards. Before using it for international transactions, check if your card supports the same. 

Prepaid cards: Fees and costs

Specific fees are applicable when using a prepaid card, such as usage fees, one-time annual or monthly maintenance fees, reload fees, etc.

Here is all you need to know about the fees and costs associated with prepaid cards:

  • Maintenance fee: This is charged either as a one-time fee or as a monthly fee for the privilege of using the card and is levied by the card provider. The charge is around 10 USD and differs from one provider to another. Mastercard, Paypal mastercard charges 4.95 USD for maintenance. 
  • Activation fee: You may be charged an activation fee, which is approximately 5 USD and differs from one provider to another. This fee goes towards the initial activation of the card. Online cards have no activation or opening fee. For example, Bluebird American Express charges 5 USD for opening and activating the card. Paypal Mastercard charges no opening fee when purchased online. 
  • ATM charges: Prepaid cards can charge withdrawal charges of around 5 to 15 USD, based on the provider. For example, the Paypal Mastercard charges 2.5 USD for ATM use. 
  • Checking Balance: Prepaid cards can charge for checking balances as well. For example, the Paypal Mastercard charges 0 to 5 percent of the total checking amount for checking the balance. 
  • International usage: Prepaid cards may charge for purchases and usage outside of the US. For example, Paypal Mastercard charges 4 percent on purchases made outside the USA, but Bluebird American Express has no international usage charges. 
  • Reload charges: Some cards may also charge a small fee for reloading money on the card. This fee may vary between 0 to 5 percent based on the provider. 

Prepaid card regulations 

There are specific regulations and legal requirements that need to be taken into consideration when issuing or using a prepaid card. The government authorizes specific providers to issue these cards, and it is essential to make sure that you insure the card at the FDIC website for its safety and protection.

Disclosures: Providers have to offer two different kinds of disclosures to customers that contain essential information such as:

  • Charges levied
  • Insurance notice under the FDIC
  • Contact information for various purposes

These disclosures are a legal requirement. There are two forms - a long form and a short form. Both these forms need to be provided by the issuer to the customers.

Tips for using prepaid cards

  • Purchase cards that are usable at maximum locations and avenues. Check for card usability and the versatility of the card. 
  • Buy only from a valid and authorized distributor of prepaid cards backed by popular fintechs such as Master card, American Express, Visa, etc. 
  • Purchase cards based on the charges that they charge. Online cards charge no activation and opening fees as opposed to physical cards. 
  • Purchase cards that charge less fees for maintenance, reloading, and ATM withdrawal. Anywhere between 0 and 4 USD is a reasonable price. 
  • If you are purchasing cards for international usage, check for cards that charge less than 5 percent should be good. 
  • Insure your card under the FDIC to protect the money and personal details that are linked to the card. 

Real-world examples & insights from prepaid card users

Here are some real-world case studies and examples of prepaid card usage.

1. Visa prepaid cards are being used to streamline government payments in the District of Columbia

The US Government in the District of Columbia is issuing over 35000 prepaid cards instead of paper checks to deal with the distribution of funds in connection with the unemployment benefit program, summer youth employment program and for the child and family services agency. 

Research conducted by U.S. Bank indicates that cardholders value their District of Columbia Visa Prepaid card as it provides them with electronic banking services that they would otherwise not be able to obtain.

  • 78% are satisfied with their Visa-branded U.S. Bank Prepaid Card.
  • 75% use their card for everyday purchases and to pay their bills.
  • 74% find that the text alert service helps them manage their money.
“For our residents that don’t have bank accounts, receiving payments through a Prepaid card allows them to receive their funds on time, access them when and how they want to and keep track of the money they have. - ”Ingrid Richards, Financial Analyst, District of Columbia

2. Vantage credit union and Y 12 federal credit union

Vantage and Y 12 credit unions utilized their prepaid card services not only for their customers but also to reward their employees for a good job done. This increased employee engagement and motivated employees to become the biggest ‘collector’ of the month. 

Prepaid cards served as a means to distribute funds and to ensure that employees or recipients of the gift card were able to make use of the funds without having to mention bank accounts or divulge personal information. 


Prepaid cards offer a flexible and versatile mode of payment that allows cardholders to pay as they go without having to carry cash or borrow money from the bank. It helps cut down expenses safely and privately, especially for those who may not have bank accounts. 

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