Excerpted and updated from “Debit, Credit and Prepaid Cards: There Are Differences,” Summer 2012.
Many consumers use debit, credit and prepaid cards, often interchangeably; however, these three types of cards are quite different. Consider the following:
Each card works differently. When you use a credit card, you are borrowing money that you must pay back with interest if you do not pay the balance in full by the due date. But, if you use a debit card, which is issued by your bank and linked to your checking or savings account, the money taken from the account is yours and you will never incur interest charges. With prepaid cards, you are spending the money deposited onto them in advance, and they usually aren’t linked to your checking or savings account. Prepaid products include “general-purpose reloadable” cards, which display a network brand such as American Express, Discover, MasterCard or Visa; store gift cards; and payroll cards for employer deposits of salary or government benefit payments.
Watch for fees. You may be charged an overdraft fee if you use a debit card for a purchase but there aren’t enough funds in the account and you have given your bank written permission to charge you for allowing the transaction to go through. You can always revoke that authorization if you don’t want to risk paying these fees, and future debit card transactions will be declined if you don’t have the funds in your account. Similarly, a credit card issuer may decline a transaction that puts you over your credit limit unless you have explicitly agreed to pay a fee to permit over-the-limit transactions. Prepaid cards cannot be overdrawn, but costs may include monthly fees, charges for loading funds onto the card and fees for each transaction.
Your liability for an unauthorized transaction varies depending on the type of card. Federal law limits your losses to a maximum of $50 if a credit card is lost or stolen. For a debit card, your maximum liability under federal law is $50 if you notify your bank within two business days, but if you notify your bank after those first two days, under the law you could lose much more. Your liability for the fraudulent use of a prepaid card currently differs depending on the type of card, but that may be changing soon. Federal law already treats payroll cards the same as debit cards in terms of limiting losses. In 2016, the Consumer Financial Protection Bureau issued rules providing the same liability limits to other types of prepaid cards. Those rules are currently slated to become effective on April 1, 2019.
In addition, the funds you place on a prepaid card may or may not be covered by deposit insurance in the event of a bank failure. For information about deposit insurance coverage for prepaid cards, visit the FDIC webpage.
For all cards, industry practices may further limit your losses, so check with your card issuer.