What is a Prepaid Debit Card?

Regardless of how much amount of money you have stored in a bank, there is always that issue of your ability to use it. How could you have access to all that money without having to lug around wads of cash? Unless your name is Floyd Mayweather there are quite a number of methods that you could use to use that money without having to withdraw the same from an ATM but the most prevalent of this is a prepaid debit card.

Now, prepaid debit cards are instruments that allow you to use a certain amount of money stored in it for every transaction you make. However, due to its unique nature, not a lot of people fully understand what they are signing up for with this type of card. As such, here are some of the basic concepts that you need to comprehend before you decide on getting one for yourself.

What is it?

The simplest answer to this question is that a prepaid debit card is an ancillary banking product. What that means is that banks and financial institutions often offer these cards for applicants. The basic concept is that the card can store a certain “amount” of money which you can then spend at any place that allows for prepaid debit cards.

We always had debit cards that came with our current accounts but a prepaid debit card was something not offered by banks but by new financial technology companies that did not have a banking license. For that reason they couldn’t offer any security of money, nor was offering a credit card an option. So the prepaid debit is born from young upstart companies wanting to break into the traditional market of banks.

In a general sense, you spend money using whatever amount was stored in the card. Once all of that money is used up, you can then load more money on to the card through your bank of choice.

Now, since prepaid debit cards are alternative banking products, does that mean that you need a bank account to use them? Technically speaking, no. Yes, that card needs to get funds through a bank account but having one is not a requirement to be legible for a debit card.

The core premise of a prepaid debit card is in resource management. Let us say that you are a person who runs a strict budget but can’t help themselves to buying more than what is needed. For instance, you have £100 in your pocket right now. If you are not careful, you could easily spend that money in a number of transactions that you don’t need. In fact, you’d be surprised how much of that amount is going to be spent for a lot of unnecessary activities within a day.

However, put the same £100 in a prepaid debit card, you relegate that money for more important activities. You’d still use that money, there’s no doubt about that, you are subconsciously telling yourself that that amount is going to be used for more deliberate and necessary transactions.

Alternatively, prepaid debit cards have also been sought after by those who have a hard time managing multiple credit cards. Think about it this way, if you have one card to use for all of your transactions, you are bound to remember what obligations you will have to pay for in due time. At least, that’s the theory.

How Different Is it From other Cards?

If you are the person who has a problem dealing with different cards and are considering a prepaid debit card, the first question that will definitely pop into your mind is this:

“What’s the point of adding another card?”

What could possibly be a reason for you to apply for a prepaid debit card? On a more functional perspective, what feature does it have that makes the inclusion of this card to your life worth the effort?

But, on a more simpler scale, you might just be wondering what makes a prepaid debit card different from a credit card or even a standard debit card. What you have to remember is that, despite their differences, they have some key similarities. The most common of these similarities is that all three of them are generally accepted in establishments that allow for card-reliant transactions. Put into practice, this means that if a business allows for credit cards, there is a 99.99% chance that they would also accept prepaid debit cards. And vice versa as both will either work through the Visa or Mastercard network.

So, what’s the difference between these cards, then? The answer lies in the source of the funds. Here’s a simple explanation of the differences:

• A debit card uses the money that you have in a bank account.
• A credit card charges an expenditure to your credit line whenever you make a transaction.
• A prepaid debit card uses the amount loaded into it whenever you make a purchase.

But if you need a bit more elaboration, here are some other key differences:

1. Building Credit History

Opening a credit card and using it will affect the entries in your credit history. For debit cards, standard and prepaid, they do not affect your credit history as you are not borrowing the money.

2. Source of Money

As was stated before, a credit card charges that expenditure to your credit. In other words, credit cards use a “buy now, pay later” scheme. For debit cards, however, the expenditure will be automatically taken off from either your bank account or the money loaded into your prepaid card straight away.

3. Liability in the Event of Loss and Theft

If your credit card gets stolen, you have the option to freeze it so nobody can use it. At best, you will have to pay a small fee to freeze it and apply for a new one.

But with debit cards, you have to act quickly if they get stolen. Prepaid cards have their amounts loaded into them which means anyone who possesses the card can still use it. Although with innovation many providers now provide an “off” switch from their app.

The same goes for a standard debit card who will automatically take chunks of money from your bank account with each person. Your degree of liability for each purchase not made by you is going to be dependent on how quickly you inform the authorities that you lost your debit card.

4. Emergency Use

If you do not have means to withdraw money, you can use both credit and debit cards for your transactions. The only problem is that not all establishments accept cards for payment. As such, inquire at the business first and have some spare money if they cannot process your card.

5. Interest Charges

A debit card will have some interest charges for every transaction. With debit cards, there are no charges.

How Does a Prepaid Debit Card Work?

In order to answer this question, let us set up a scenario. Imagine that there are two persons, one has a credit card and another has a prepaid debit card. Let us say that both are trying to purchase the same smartphone at the same electronics store at £1,200.

The person having a credit card swipes at the counter. What happens is that the credit card company adds that purchase to the person’s outstanding balance. What that means is that that person has until the next billing period to settle all their obligations with the credit card company or suffer a major demerit in their credit score.

Then, the person having a prepaid debit card swipes their card at the counter. In this instance, the amount of the transaction is immediately taken off from the balance at the card. So, if that card has a balance of £1,500, then there is only £300 left at the swipe. This person did not incur a debt since they effectively paid for the phone with the amount stored in their card.

What are its Benefits?

Of course, like any other banking product, a prepaid debit card offers a distinct set of advantages for holders. They include the following:

1. No Credit Checks

Whenever you apply for a credit card or even open up a new account, the bank will do their own investigation called a credit check. This is where they do a hard search on your credit information to determine if you are a person trustworthy enough to handle all of the obligations that they will impose on you.

So what if you are  a person who has some outstanding liabilities, missed a few payments, or, worse, committed credit card fraud? More often than not, your application is going to be rejected.

This credit check is necessary so as not to expose the bank to liabilities. However, it can also be long and tedious. With a prepaid debit card, there is no need for a credit check which shortens the processing period considerably.

2. Direct Deposits

A direct deposit allows you to do away with the long and tedious process of depositing your money to a bank. Although the use of cheques seems to have diminished in recent years let us say that you just got your pay check for that month. In order to use that money, you’d have to drive yourself to the bank, head to the counter, deposit the check, and get your money in a day or two.

Even with the faster online version, it would take you several scrolls through multiple pages and button inputs just to have that money deposited. With a prepaid debit card, however, you will have an account that immediately allows for direct deposits through a program. In fact, a lot of employers are using prepaid cards as a paperless alternative to the traditional payroll system.

3. Online Transactions

The new prepaid debit cards today are designed for a lot of online transactions. This includes paying bills and, of course, online shopping. You simply have to go through a shopping platform, buy what you want, and link your card to that transaction. Once the payment method is accepted, the money will be automatically taken off the load in your card.

Just keep in mind that this feature is not exclusive to prepaid debit cards. Nearly every card today, even a standard ATM card, can be used for online shopping. However, that does not reduce the impact of having NOT to go outside, drive for a few minutes to an hour, and jostle through crowds in the High Street just to get what you want.

And in light of the pandemic which seems to be not going away for the foreseeable future, the ability to do your shopping without stepping outside is always a welcome feature.

4. Theft and Loss Protection

The problem with carrying with you paper money is that it is all too easy to lose track of them. Think of it this way: how often have you come home from a trip and get this nagging feeling that you might have lost a few more notes than what your receipts are telling you. Chances are that you might have overspent or some notes fell out of your wallet while you were paying for your purchases.

And then there’s the threat that you’d be preyed on by people who want to get a hold of your cash. From pickpockets to grifters to actual thieves, there is no shortage of threats that want to get a hold of your paper money whenever you step outside of your home.

With a card, you don’t have to worry about someone trying to yank off wads of cash out of your wallet. Instead, you only have to make sure that your card is well protected. Of course, you have to do your part to make sure that the information stored in your card is not exposed to thieves online or in the real world.

And even if that card gets stolen, there is not a lot that that person can do as there are multiple layers of protection that prevents fraudsters from using it. The only requirement here is that you report the theft of your card immediately. That way, you won’t be held liable for the purchases made in your account without your authorisation.

5. Better Debt Management

A prepaid debit card is perhaps the best tool to curb one of the biggest problems with credit-holding folk in the past decade: overspending. This goes back again to the concept of a prepaid debit card having a limited amount of money contained within it at any given time.

As such, if you hit the limit in a card, your transaction will not be honoured. At the very least, you can re-load on the card and do the transaction again. However, it also gives you enough time to reconsider your purchase and do something else better with your money instead.

This is unlike a credit card where the transaction gets charged to your credit even if you have already maxed out. That means that, instead of actually preventing you from overspending, the non-immediate financial road bump you feel with a credit card does not actually prevent you from overspending. But, with a prepaid debit card, you would immediately know if you have already reached that card’s limit, giving you enough time to second guess on your financial decisions.

What are the Downsides?

If there are some benefits to having a prepaid debit card, there are also some disadvantages. This is just natural since not everything is perfect, especially in the field of financial products. As such, here are some potential drawbacks with prepaid debit cards that you will have to seriously consider.

1. Fees

Compared to other financial products, prepaid debit cards or debit cards in general are not strictly regulated. What this means is that the one issuing the card has a wide latitude of control over what terms you will be subjected under.

Here’s an example, that issuer might impose a fee to activate the card. After that, they might issue a fee for every transaction you make. In fact, there are prepaid debit cards out there that charge you when you:

• Use an ATM
• Check on your available balance
• Load money to the card
• Ask for customer support

All in all, relying on a prepaid debit card solely for your transactions is going to become expensive. In fact, there are some debit card issuers out there who may also charge for monthly maintenance fees aside from the other fees that they are already charging you.

2. No Credit Building

If you are a credit holder, then you would know how valuable it is to build on your credit. After all, a good credit score is what spell’s the difference between your applications for loans or even rents being accepted or not.

And therein lies the problem with prepaid debit cards: they are completely set aside when it comes to computing your credit score. In the UK, there is no credit agency that is going to factor in your prepaid debit card transactions into computing your credit score.

This might be due to the fact that the debit card is a completely different product and debit is completely different to credit. Whatever the case, having a prepaid debit card is not going to affect your credit score, for better or worse.

3. Security Issues

Due to the lack of regulation, there is no standardised security features for prepaid debit cards. This means that every card issuer is going to give you different sets and levels of security for your card. One card might offer stronger fraud protection while another has minimal protection to zero.

The only good news here is that UK’s consumer protection laws were worded so distinctly that all forms of banking products can be covered in their provisions. So, if ever you were defrauded with your card, you can pursue the case to court. Granted, of course, that you knew who defrauded you and how.

So, Are Prepaid Debit Cards Better?

The answer to this question is “No, not really”. In fact, no banking product out there is inherently better than any other. Each card has its own sets of uses, benefits, and disadvantages and that includes prepaid debit cards.

Here’s a good example. Supposed that you are a person who knows how to handle debts properly and has been consistently making big purchases. If that were the case, then using a credit card would be of no problem to you.

However, if you are the person that wants to discipline themselves with their spending but don’t want to be carrying wads of cash with them wherever they go, then a prepaid debit card would be ideal. It is a less expensive alternative but, at the very least, you don’t have to put yourself in debt.

Aside from that, there is nothing that a prepaid debit card can offer to you in terms of credit building. There is also not a lot of debit card issuers out there with a dedicated rewards program. If you are the one that is looking for perks for constantly using a card, then you might be better off with a credit card.

How Do I Manage a Debit Card?

Undoubtedly, prepaid debit cards have their own set of demands and downsides. As such, careful use of these cards is going to be the key to your success with them. Managing a prepaid debit card tends to be straightforward but here are some few tips that will help you maximise your usage of them while minimising risks.

1. Know What Fees Apply – First and foremost, you have to know what that store is going to charge you with for that card. Some stores have the option to run any card being swiped as either debit or credit, regardless of their actual type. If you choose debit, then potentially high fees will apply.

As such, make sure that you inquire from the issuer as what fees would be charged for every use of that card and read the agreement as intently as possible. Fortunately, the fees that you will be charged with will be taken from the balance of the card and not from your bank account.

2. Check the Balance – Before using your card, you have to know how much money is left in it. This is rather important as you might think that the card still has money but it has been depleted after a period of time.

This usually happens since some issuers charge maintenance fees for a card. So, if your issuer charges £10 for monthly maintenance fees and your card has a balance of £50 5 months ago, that remaining balance has turned to £0 right now.

To spare you the additional burden of having to reload your card after a pending purchase, just check on the balance before you start using it for that time.

3. Reload Infrequently – in most cases, your issuer is going to charge a fee for every reload you make on that card. As such, be smart with your reloading by doing a huge, one-time reload.  At the very least, you’d not be dealing with a lot of transactional fees at once in a single instance.

However, be mindful that some cards have limits as to how much money you can load into them. If this is the case, then try to avoid signing yourself up for a card that imposes both a loading charge and a loading limit.

4. Mind the Temporary Hold – There are times when you use your prepaid debit card at a gas station or a hotel that you will notice an additional charge called a temporary hold. A temporary hold is basically the charge being held back as your purchase might take a few days to get processed by the card issuer. That means that that establishment will wait for a few days until they are paid for whatever you purchased.

Once the transaction is confirmed, then the temporary hold is removed. However, while that temporary hold is in effect, you cannot use that debit card for anything else. As such, try to use your debit card for small, one-time purchases. The easier it is to process your transaction, the less likely you are going to experience a temporary freeze on your card.

5. Report Timing is Crucial – As was previously stated, your ability to report a stolen debit card is going to be crucial. Here’s an example: let us say that someone managed to get a hold of your card’s PIN and that person then spends the remaining balance at £500.

However, while that thief is using the card, it took you a day and a half to report the loss to the issuer. Will you be liable for the £500? Sadly, the answer is yes and that is because you did not report the fact to your issuer as soon as possible.

If that card issuer was able to know that your card was stolen immediately after the theft, then they may be able to do something to freeze the card. That way, the stolen card is rendered useless. But while the theft is not reported, that card is as good as usable.

To Conclude

With all the premises considered, you might be wondering as to who exactly prepaid debit cards are being aimed at. The simplest answer is this:

Prepaid debit cards are for those who want an alternative to your typical banking products. If you want to successfully manage your expenses without missing out on some important expenditures, then a prepaid debit card is for you. If you are not the one that is concerned with building credit for each purchase you make, then a prepaid debit card is for you.

And if you are a person who feels safer with having a less conspicuous and cumbersome method of payment for all your transactions, then the prepaid debit card is for you. Of course, there is no harm into looking at other alternatives but a prepaid debit card offers some unique advantages for those looking for a less complicated method of paying for all their purchases. All that is left, then, is to find the card issuer that will get you the card that you need.