What Is A Prepaid Debit Card And How Does It Work?

By Kyle Walker | April 22, 2019

A prepaid debit card is an alternative form of plastic that enables you to spend only the money you load onto the card. Prepaid debit cards are very similar to a bank-issued check card and provides safety and convenience to those without access to a traditional bank account. Without a traditional bank account and the check card that comes with it, it can be very inconvenient and sometimes impossible to make purchases or pay bills online. A prepaid debit card solves this problem.

Another useful benefit to owning a prepaid debit card is the ability to receive direct deposits from your employer. Paper checks can be inconvenient and costly to cash. Most banks that offer prepaid debit cards allow you to receive your paycheck several days sooner than you normally would.

There is, however, one major drawback to owning a prepaid debit card: fees.

What kind of fees?

Traditional banks have several ways of earning money, because at the end of the day, they are a business. Prepaid debit cards are the same way. Some common fees you can expect to pay while owning a prepaid debit card include: a monthly fee; a transaction fee; an ATM withdrawal fee; and a cash reload fee.

There are other fees that are less common, so right now we'll focus on the fees previously mentioned. For a complete list of the fees your bank charges, be sure to review your card's terms and conditions.

Monthly fee

A monthly fee is a fixed fee you pay every month, whether you use your card or not. This fee is deducted from your account balance every month. If your account balance is $0, the monthly fee will put your account balance in the negative and will be deducted from your next deposit. For example, if you have an account balance of $0 and your monthly fee is $5, your account balance will be -$5. If you were to load $50 onto your card, your account balance would be $45.

With prepaid debit cards, your account balance can only go into the negative from the monthly fee and will never go against your credit. With traditional banks, a negative balance can result in your account being sent to collections and a negative mark on your credit report. With prepaid debit cards, this is not the case.

Fortunately, for most cards, the monthly fee will be waived if you receive a direct deposit from your employer at least once per month.

Transaction fee

A transaction fee is a fee you pay each time you use your card for purchases in-store or online. With some cards, transaction fees can often be avoided if you opt into paying the monthly fee. If you opt out of paying the monthly fee, you will likely be subject to transaction fees instead, which are typically around $2 per transaction. If you use your card regularly for purchases, the monthly fee option would likely be the most economical.

ATM withdrawal fee

The ATM withdrawal fee is a common expense to owning a prepaid debit card. However, ATMs belong to different banks and networks, which means you can possibly avoid the withdrawal fee by using an ATM that belongs to the same network as your prepaid card.

This is very similar to traditional bank-issued check cards. If your bank is Wells Fargo and you make an ATM withdrawal at Bank of America, you will pay a fee for this service because you are using an out-of-network ATM. The same applies to prepaid debit cards. Be sure to review your card's terms and conditions to learn which ATMs are in your network.

Cash reload fee

A cash reload fee is the fee charged by a retailer for loading cash onto your card. This fee typically ranges from $2 to $3 but can be avoided all together by using direct deposit. By loading cash onto your card at a retail location, your funds are typically available for use almost immediately, which can be very convenient.

Most prepaid cards offer other methods for loading funds onto your card, some with fees and some without fees. Be sure to check your card's terms and conditions for this information.