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Debit cards and Prepaid cards

Both debit and prepaid cards offer you a way to shop cash-free. The main difference you’ll see every day is that debit cards require you to have a bank account and prepaid cards do not. There are also differences in fees and protection for your money if you loose your card.

Debit cards linked to a checking or savings account

How it works

If you have a debit card that is linked to your bank account, you can use it to make purchases and have the money deducted from your bank account. These debit cards usually have a logo for an international credit card network (e.g. Visa, MasterCard, Discover, or American Express) and will be accepted anywhere you can use a credit card.

Since they are linked to bank accounts, debit cards have all the advantages (and disadvantages) of a checking or savings account. This usually includes federal deposit insurance and protections if you lose your card.

It is important to track your spending with debit cards. With many debit cards if you spend more than you have in your bank account you can “overdraw” your account and be charged a high fee. If you’re not careful, these fees will add up quickly.

Different debit cards allow you to do different types of transactions, including:

  • Automatic Teller Machine (ATM) withdrawals
  • Withdraw extra cash when you make a purchase
  • Confirm payment by signing a receipt or punching in a
    Personal Identification Number (PIN)

Fraud protection

Debit cards usually offer more protection against fraud than prepaid cards. Though you should check with your provider to find out their policies, debit cards linked to bank accounts will typically offer:

  • Total liability: As long as you tell your debit card provider about fraud (someone using or stealing your card), the most you will have to pay is $50. This protection only lasts for 2 days, however. After that, the legal cap is $500.
  • Liability protection: When your card is stolen you are not responsible for the charges. But, debit cards are not required to offer protection against damages like bounced check fees or merchant fees.
  • Billing mistakes: You might have to pay for the charge if you have a billing mistake and then get a refund. This might lead to bounced checks or overdrawing your checking account, which can lead to fees of about $30. Then it’s up to you to work with your bank to try to get these fees refunded.

Different debit cards offer different levels of protection. This is why it is important to ask your debit card provider the details of how your card works.

Prepaid Cards

Prepaid cards work like debit cards except you don’t need to have a bank account. You make purchases in stores and the purchase amount is deducted from your prepaid balance. Many prepaid cards allow you to take money out at an ATM. You can also have funds loaded from your paycheck through direct deposit.

Prepaid cards are useful for people who:

  • Don’t have bank accounts but don’t want to always use cash
  • Parents who want a safe way to give a weekly allowance to their children
  • Employees without bank accounts who want to avoid using check cashing services

There are several different types of prepaid cards.

  • Store cards: (e.g. Starbucks, iTunes) can only be used at a specific store. There is usually no fee. However, if you don’t use the card sometimes a small amount is charged to you each month.
  • General purpose cards: prepaid cards that can be used at a wider variety of stores than gift cards. There are two types:
  1. Cards with a PIN that can be used only at point of sale machines (e.g. grocery or drug stores) and ATMs
  2. Signature cards that have a logo from a national credit card network (e.g. MasterCard) and that can be used wherever a credit card is accepted.