What Is a Prepaid Card?

By Markets Fool.com

A prepaid card can be a valuable financial tool for several reasons. In addition to being an alternative payment method, prepaid cards can be useful for budgeting and saving money. They also come in handy in situations where cash isn't practical to use, such as when shopping online or paying bills electronically.

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How Prepaid Cards Work
A prepaid card is a form of debit card that works similarly to a check card. You deposit money on your card, either through direct deposit or in person, and then you can use your card at most merchants that accept that particular type of card (Visa, MasterCard, Discover, or American Express).

Prepaid cards have several potential benefits, but they also have a few drawbacks you should be aware of before deciding whether or not a one is right for you.

Practical Uses and Benefits
There are plenty of reasons a prepaid card could be a good idea, but keep in mind that not all prepaid cards have all of these benefits.

  • They're accepted in situations where cash is not (such as online merchants).
  • They can serve as a substitute for a checking account.
  • They may let you directly deposit your paycheck onto the card.
  • They may be connected to a network of ATMs for fee-free withdrawals.
  • They're a good tool for teaching kids and teens about budgeting and saving.

Drawbacks to Prepaid Cards
Like pretty much every other product, there are potential drawbacks to be aware of.

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  • There's a potential for high fees for actions including activating the card, reloading it, making ATM withdrawals, and more. And those fees can vary widely between cards.
  • Some businesses won't accept prepaid cards (like rental car companies).
  • They may have less fraud protection than credit and check cards (different cards have different fraud/theft protections).
  • Using one will not help you build credit.
  • Deposit methods might be inconvenient.

Prepaid cards aren't for everyone, and you may find that a traditional checking or savings account meets your needs better. However, if you don't have or can't get a traditional bank account, or you simply want a different way to budget and spend money, a prepaid card may be a good option. Just be sure to shop around and compare features and fees.

The article What Is a Prepaid Card? originally appeared on Fool.com.

Matthew Frankel owns shares of American Express. The Motley Fool recommends American Express. The Motley Fool owns shares of Capital One Financial.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.