Prepaid Card vs. Debit Card

If you are confused over what a prepaid card is versus a debit card, don’t be embarrassed. You’re certainly not alone, as so many people feel the same way. These types of cards are your options between paying with cash or paying with a credit card. They pay for your purchases using your own money but that money is loaded into the card. The similarity ends there, however, and each one has its advantages and disadvantages.

1. How They Function

A prepaid card is loaded with your own money and is reloadable. You can only use the amount that is in it, no more than that. While it may seem inconvenient at first, when you get the hang of it, you’ll realize that it takes you out of debt zone and disciplines your spending habits.

A debit card is attached to a bank account and all purchases are deducted from the money in your account. You’re still not getting into debt, which is a good thing, but the chances of an overdraft are high. This occurs when you make a transaction that costs more than what you have in your account. Even though your purchase is authorized and consummated, the bank will charge you with an overdraft fee. Each purchase done with insufficient funds in the bank will cost you and multiple overdraft fees may be charged.

2. Protection in Case of Loss or Theft

A prepaid card is not connected to your bank account. If it gets lost or stolen, the money you lose is limited to the available balance in the card. Immediate reporting of a lost prepaid card may yet salvage the money in it.

A debit card is linked to your bank account. If lost or stolen, and the PIN is known to the holder, all the cash in your account can be used up and spent or withdrawn. If your debit card has fraudulent charges and you notify the bank within two days after discovering the fraud, you have a liability of $50. More than two days charges you a liability of $500 and up to your entire account after 60 days. This is a Federal Trade Commission law and there’s no getting around it.

3. Credit Rating

A prepaid card used to pay bills on time can get such transactions reported to any of the three major credit bureaus. Over time, a good credit history is built leading to a higher credit rating and score.

Banks that are linked to your debit card don’t report your responsible use of the card to a credit bureau. Even if you’ve never charged beyond the amount in your account and there are no overdraft fees, your credit rating is not positively affected.

The battle between prepaid card vs. debit card is definitely lopsided in favor of the prepaid card. It has a lot of benefits that aren’t present in the debit card and none of the disadvantages. Knowing this information, which one would you go for? The prepaid card, obviously!