How are prepaid cards, debit cards, and credit cards different? | Consumer Financial Protection Bureau (2024)

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How are prepaid cards, debit cards, and credit cards different? | Consumer Financial Protection Bureau? ›

Prepaid cards and debit cards are ways to spend money you already have. Credit cards are ways to borrow money.

This can be confusing because both types of cards may have a card network logo such as Visa, MasterCard, American Express, or Discover on them. When you use a credit card, you are borrowing money. Generally, when you use a prepaid card, you are spending money you have already loaded onto the card in advance.

With secured credit cards, you're spending money that you borrow from the credit card company. You pay that money back after the purchase. With prepaid debit cards, you're spending your own money. You load money onto the card before the purchase.

A secured card requires a deposit, but the user still pays monthly; a prepaid card requires a deposit onto the card, which the user then spends from. Banks can pick both the interest rate and the borrowers they lend money to.

Debit cards are linked to a checking account, while prepaid cards aren't and instead require you to load money onto the card. Neither card helps you build credit, but despite this drawback, both prepaid cards and debit cards can help you manage your money in different ways.

Key Takeaways. Debit and credit cards both allow cardholders to obtain cash and make purchases. Debit cards are linked to the user's bank account and limited by how much money is in there. Credit cards provide the user with a line of credit that they can borrow against as needed and pay back later.

Debits are incoming money and credits are outgoing money. In accounting and bookkeeping, debits increase assets and decrease liabilities, and credits increase liabilities and decrease assets.

Secured credit cards can help establish or rebuild the customer's credit history. They are not the same as a prepaid or debit card, though. Unlike prepaid cards, secured credit cards give the customer a credit line, and report payment activity to the major credit bureaus as though the card was a regular card.

​What it is

​A credit card is a loan. ​A debit card is linked to your bank account and is issued by your bank.​ ​There are a variety of prepaid cards, including "general purpose reloadable" (GPR) cards which carry a brand of a card network (such as Visa or MasterCard) and can be used where that brand is accepted.

It is loaded with a balance ahead of time, and this balance acts as your spending limit. The prepaid card can then be used in place of a credit card for payment, but unlike a credit card, the prepaid card won't build up any debt or incur interest charges.

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While secured credit cards require you to provide a security deposit that usually establishes your spending limit, they can be used to cover many of the same transactions as unsecured credit cards, including renting a car.

Credit cards offer flexibility in spending, with the ability to carry a balance from month to month. On the other hand, a prepaid card is a type of payment card that is preloaded with a specific amount of money.

Here are a few of the disadvantages of a prepaid debit card: Card is not linked to a personal banking account, meaning there is no interest earned. Losing money due to inactivity. Prone to being charged for several miscellaneous fees.

Protections: Reloadable prepaid cards have liability and fraud protections by federal law. One safeguard many cards have is federal deposit insurance, meaning your money is covered if an issuer becomes bankrupt.

Prepaid cards generally allow you to make purchases in the same way as credit and debit cards. The key difference is that prepaid cards aren't linked to a bank account or a line of credit. So to use one, money has to be loaded onto the card. Keep in mind that there may be fees to activate or use prepaid cards.

Prepaid cards can be declined because you don't have sufficient funds in your account, the card hasn't been activated, the merchant doesn't accept the network's cards, or you have exceeded your spending limits. Any information you provide to the merchant must also match what's on file with the prepaid card issuer.

In contrast, prepaid cards don't impact your credit. Since you can only spend money you've got on the card and you aren't borrowing any money, there isn't any payment history to report to the credit bureaus and there won't be any impact to your score.