Debit cards and prepaid creditcards usually fall into the category of having similar enough functions that people end up asking what the difference actually is. While both function as tools for cashless transactions, there are a number of fundamental differences and similarities for both.
The most obvious similarity is that unlike a credit card, debit cards and prepaid credit cards only use the amount that’s been stored within, instead of borrowing funds as credit cards do. Both debit and prepaid credit cards can be branded with a payment gateway – usually Visa, or MasterCard. They are accepted at establishments the same way credit cards are, providing that the merchant is partnered with the aforementioned gateways.
There are other differences, and here’s a look at some of them.
Debit cards are treated as extensions of your bank account, allowing you to draw funds from it in order to make cashless transactions. As such, they can be used as long as you have the necessary funds in your bank account.
Prepaid credit cards are wholly removed from a bank account and rely solely on the funds already inside it, but can be reloaded with cash or a check. There are also establishments that sell prepaid merchant cards that can be given as gifts.
The only real amount you pay for a debit card is an overdraft fee that you’ll have to pay if you overdraw on your bank account and don’t have overdraft protection. Some debit cards may require a service fee, wholly dependent on your bank.
A prepaid credit card usually has a minimal monthly fee in order to remain active and is taken directly from the funds on your card, so you always have to make sure that you have enough on the card in order to keep it active. But this is only in the case of cards branded with a payment gateway like Visa or MasterCard.
Debit cards are similar to credit cards in that they also have an expiration date, but your bank will send you a replacement card after it expires. Since prepaid credit cards aren’t linked to any bank, they can be considered spent after the initial amount has been used, but as they can be reloaded, they can remain active as long as you keep it topped up.
A major downside to prepaid credit cards is that if they’re stolen, the funds are gone. Debit cards can be canceled and the charges disputed.
These cards are similar in that there are limitations to what they can and cannot do. Prepaid credit cards are limited to the funds previously added to it, meaning that it will be automatically declined once the amount inside has been depleted. Cards linked to specific merchants can also expire, and you will lose the money inside if it isn’t spent before the expiration.
Debit cards, on the other hand, are limited by the amount that’s in your bank account. Going beyond that limit means incurring overdraft, but if the debit card has overdraft protection, you can go over the limit in your bank account. The downside to this is that it will incur fees and interest.
The convenience of cashless transactions can be attained with debit cards or prepaid credit cards, but you’ll have to be mindful of the amounts that they contain in order to avoid any issues with transactions.
Their biggest draw is the fact that unlike credit cards, the chances of acquiring debt are near-zero, which means you get most of the benefits without any of the hassle.