Prepaid cards and debit cards are similar but not the same.
A debit card may be regarded as a more 'advanced' version of a prepaid card. However, a prepaid card may be a better option in certain circumstances.
In order to explain their differences, let’s first examine each type of card in more detail. Then we’ll take a closer look at their differences and their advantages and disadvantages for different types of use.
What is a prepaid card?
A prepaid card (sometimes mistakenly referred to as a prepaid debit card) is a type of payment card which is not linked to a bank account (a current or savings account).
It only holds the credit it has been 'pre-loaded' with. Once this balance is spent, the card cannot be used until additional funds are 'topped up' (in a pay-as-you-go manner).
Prepaid cards usually expire after a fixed period of time.
Gift cards are one type of well-known prepaid card.
Other kinds of prepaid cards effectively function like a gift card, but they are often marketed differently. Examples include:
- Worker’s expense cards
- Children’s bank cards
- Travel money cards
What is a debit card?
A debit card (also known as a bank card or a cheque guarantee card) is a payment card that is linked to a bank account.
Cardholders can spend money in their bank accounts using their card, either in chip and PIN machines or using contactless functionality, and make cash withdrawals from ATMs or even merchants (with the cash back function).
The English word ‘debit’ comes from the word ‘debet’ in Middle French (French from the 14th – 16th centuries). ‘Debet’ itself comes from the Latin ‘debitum’, which means, ‘what is owed; a debt’.
Debit cards are probably known as such because the holder debits their account each time they use the card.
What are the similarities between prepaid and debit cards?
There is no difference between how prepaid and debit cards are used to make purchases.
Both can normally be used for online or in-store purchases and both sometimes require personal identification number (PIN) codes for purchases over a certain amount.
Some debit cards even have settings for spending limits.
Unlike credit cards, neither influence the holder's credit score.
What is the difference between prepaid and debit cards?
The main difference between a prepaid and a debit card is that the latter is linked to a bank account and the former is not.
So, a prepaid card can only spend up to the amount of money pre-paid onto it. A debit card can be used to spend the available funds in its linked account plus any available overdraft limit. The only exception might be if there is a daily spending limit.
This difference creates advantages and disadvantages for each kind of card.
Advantages of a prepaid card vs. a debit card
A prepaid card is easier to obtain than a debit card. It usually doesn't require a credit score check.
It has more rigid spending limits than a debit card, but this can sometimes be useful. Unlike debit cards, prepaid cards are useful for handing over to someone else, because you can control or allocate the spend.
For example, a parent might give their child under the age of 16 a prepaid card when they go away on a trip. This gives the child spending money and saves them from carrying around cash.
Some people find using a prepaid card useful for managing their personal finance because of its limits. This is only practical if the card is synced with an app. It helps them track and adhere more strictly to budgeting targets.
Prepaid cards are often used for travel money, where they can be preloaded with foreign currency (to help you avoid currency exchange fees), help with budgeting, and minimise the risk and inconvenience of losing your main bank card abroad.
The risk of fraud on a prepaid card is much lower, too, because it doesn't potentially enable direct access to funds in a bank account.
Advantages of a debit card vs. a prepaid card
Debit cards have more flexible limits than prepaid cards. Not only can holders spend according to what they know is in the account (if they have an associated app).
Debit cards also don't require the holder to top them up. A task that if forgotten or late can create immediate problems for the card holder.
For the majority of people with access to mainstream financial services, debit cards are more likely to be used in the long-term. They are useful for regular wage payments, standing orders, subscriptions and other automated payment types.
OnePay's cards for workers
Seasonal workers who come to the UK from abroad may be among those who do not have access to mainstream financial services.
There are three main obstacles to setting up a bank account for temporary foreign workers:
- No proof of address: Most UK banks require this for setting up a bank account and issuing a debit card
- Lack of time: Visa rules for temporary workers usually lead to them arriving in the country only shortly before their work begins
- Language barriers: Opening a bank account in a new country and another language can be challenging!
These accounts enable employers to provide their employees with secure cards (which include a chip and PIN) that are easy to set up and come with a multilingual app and dedicated support.
Conclusion
It's easy to forget how inconvenient carrying cash around was. Prepaid cards and debit cards both provide card holders with a quick and convenient way to make purchases.
Prepaid cards are easy to acquire, set up and don't carry the same level of risk as debit cards. When it comes to day-to-day purchases, both cards function in the same way. And unlike a secured credit card, neither contributes to the cardholder's credit score.
The main difference between prepaid and debit cards is that the latter is linked to a bank account.
This limitation is either a benefit or a drawback for prepaid cards, depending on how it is used.
It may cause difficulties in some situations, but be useful in others - such as quickly paying temporary workers without a UK address or bank account.
Debit cards are generally more flexible than prepaid cards. Cardholders don't need to load money onto the card each time they've exceeded a set spend. They can even go beyond the existing value of their checking or savings account if they have an overdraft function.
Their downside is that they are harder to set up and if lost or stolen pose more of a threat to the holder's finances. They are also less secure when passed onto third parties.
Understanding these differences will help you see how each card type can serve valuable specific purposes for individuals in certain circumstances.
