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How Do Prepaid Cards Work?

You can find prepaid cards almost everywhere—grocery stores, gas stations, post offices, banks, and online. But how do they work, how are they different from credit and debit cards, and what role do they play in financial wellness?

Let’s take a deep dive into prepaid cards.

The Functionality of Prepaid Cards

Making a purchase with a prepaid card looks the same as with a debit or credit card. You will swipe or insert your prepaid card when purchasing just as you would a credit or debit card. Online purchases will also be made in the same way—by using the 16-digit prepaid card number. And, in some cases, you can even use your prepaid card to withdraw cash from ATMs.

Because prepaid cards are backed by major networks like Visa or Mastercard, they’re accepted anywhere that takes debit and credit cards.

How do Prepaid Cards Differ from Debit Cards?

While there are many similarities between prepaid cards and debit cards in terms of functionality, there are some differences behind the scenes.

The biggest difference is where the money comes from. A debit card is linked to a bank account and your purchases are paid for with the money in that bank account.

A prepaid card, however, isn’t linked to any bank account. Instead, you’re spending money that has been put in the prepaid card account in advance of using the card. This is referred to as “loading money onto the card.” Some prepaid cards are loaded by an outside entity and cannot have additional funds loaded.  Other prepaid cards are “reloadable,” which can be done by cash, check, or direct deposit.

This pre-loaded amount is your spending limit. Once you’ve hit it, you can’t use the card again until you load more funds.

How do Prepaid Cards Differ from Credit Cards?

The card network logo—Visa, Mastercard, etc.—may look the same, but a prepaid card is very different from a credit card. With a credit card, you borrow money from your credit limit (determined by your credit score and other factors) on that credit card account. As mentioned above, the amount pre-loaded onto your prepaid card is what’s available to spend.

Another difference is that a credit card can help improve—or hurt—your credit score. A prepaid card is not tied to your credit score and cannot help build credit.

Also, with a prepaid card, you aren’t charged interest. With a credit card, however, if you don’t pay the full balance by the due date, you will likely incur interest.

Prepaid Cards and Financial Wellness

With over 7 million unbanked American households, prepaid cards have a solid niche as an alternative banking product.

Because prepaid cards generally max out at the pre-loaded amount, users typically don’t rack up debt like with credit cards or overdraft fees like with debit cards. Most prepaid cards have eliminated fees, but here is a template demonstrating how to evaluate any potential fees.

Prepaid cards are a safe option for unbanked individuals to access paychecks. Because prepaid cards come with account and routing numbers, paychecks can be deposited directly into a prepaid account and “loaded” onto the card. Doing so can mean avoiding costly payday loan fees that often trap users in a cycle of debt.

Prepaid cards are also helpful for budgeting and financial planning by managing overspending, identifying spending habits, and building budgeting discipline.

While cash is also an effective way to manage spending, prepaid cards are a more secure alternative. Instead of the vulnerability of carrying cash, prepaid cards can include fraud protection and pre-loaded funds that are FDIC-insured, in many cases. Stay updated on the government’s prepaid protection rules.

Unbanked individuals can also use prepaid cards to pay bills and safely receive and store government assistance. Check out more details on how prepaid cards can help the unbanked.

Your Partner in Financial Empowerment

At Sunrise Banks, financial wellness is our mission and motivation. Prepaid cards allow unbanked individuals to safely and easily use their money and improve their financial literacy—and is therefore a big part of our financial wellness focus.

That’s why we’ve designed the Sunrise Banks’ Prepaid Mastercard®. Learn more about this safe alternative to traditional banking.

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