Prepaid Debit Cards—Safety and Limitations
Are Prepaid Debit Cards Safe for Everyday Purchases?
Prepaid cards, which are sometimes mistakenly referred to as prepaid debit cards, are a viable option for unbanked individuals as they are easy to obtain, more convenient than cash, and allow spending only the amount loaded onto them. It's important to note that prepaid cards and debit cards are two separate products. However, for the sake of this article, we'll be referring to prepaid cards as "prepaid debit cards," as although incorrect, this term is commonly used by consumers to identify the product at hand. The critical question is—are prepaid debit cards safe? You will find the answer in this guide and also learn the following:
- How prepaid debit cards work
- How you can acquire a prepaid debit card
- What the benefits and limitations of prepaid debit cards are
How Do Prepaid Debit Cards Work?
Prepaid debit cards are payment cards that you can load with money and use until the funds are depleted. They are branded by major credit card companies such as Mastercard®, Visa®, or Discover®, and you can purchase them at banks, select retailers, credit card companies, or other financial institutions. Once you spend all of the funds on your prepaid debit card, you can typically reload the card online, at an ATM, a participating store, or another physical location.
A prepaid debit card works in a similar way to a regular debit card. You need to enter its 16-digit card number, CVC code, and expiration date during checkout to complete online transactions. For in-store purchases, you need to provide a four-digit PIN at a POS terminal. The card issuer typically allows you to set the PIN when registering your card.
Besides online and in-store purchases, you may also use the cards to withdraw cash from ATMs, pay bills, transfer funds, or receive direct deposits from your employer.
How To Get a Prepaid Debit Card?
Below, you can find various methods on how to obtain a prepaid debit card at participating locations:
| Purchase Method | Application Process |
|---|---|
| At select merchants | Retailers and participating stores, such as Walmart, Kmart, and 7-Eleven, sell prepaid debit cards that you can typically load with funds immediately. Note that you may be required to register the card by providing personal details, such as your address, full name, Social Security number, and date of birth. You can also apply for a prepaid debit card online at designated merchant websites. The process typically requires you to submit Know-Your-Customer (KYC) details. After the application is approved, the card should arrive by mail within a few business days. |
| At a bank, credit card company, or other financial institution | The application process for a prepaid debit card varies from bank to bank but generally entails filling out an online application form. You should contact the prepaid debit card issuer or visit their website for specific details. |
Who Is Eligible for Prepaid Debit Cards?
Nearly anyone who is 18 or older can apply for prepaid debit cards since the application process doesn’t involve credit checks. Some vendors offer family-oriented prepaid debit cards available to minors as authorized users, where the adult monitors the transactions and controls the spending. The minimum age for authorized users on these cards varies between 6 and 13 years old.
Are Prepaid Debit Cards Safe?
Prepaid debit cards had limited consumer protection in the past, but that changed in 2019 when the Consumer Financial Protection Bureau's Prepaid Accounts Rule went into effect. Today, prepaid debit cards enjoy many of the same protections by federal law as regular debit cards. Note that for the liability protections in the law to apply, the card must be registered in a process similar to opening a bank account, where you provide personal information allowing the prepaid account to be identified under your name.
The law states that your liability for unauthorized purchases on a lost or stolen consumer (prepaid) debit card is limited to $50 if the loss or theft is reported within a designated time period. The table below shows the liability details if a financial institution provides periodic statements for the prepaid account in question:
If your prepaid card is registered, you may be eligible for zero liability protection in case of an unauthorized transaction. Many issuers, including Visa and Mastercard, offer this benefit, though it doesn’t apply to anonymous prepaid cards and certain commercial cards.
Other Protection Measures on Prepaid Debit Cards
Additional protections that may apply to prepaid debit card users based on a particular card issuer’s policies are:
- Purchase protection—Some prepaid debit card providers offer purchase protection for late shipments or faulty items.
- Overdraft protection—An overdraft protection on prepaid debit cards allows you to temporarily use the card below the $0 balance. This type of protection is still relatively rare, although some prepaid debit card issuers offer a similar service called a Purchase Cushion. It typically entails spending not more than $10 below the balance and requires you to bring your account back to positive in 24 hours without incurring an overdraft fee.
What Is the Downside of Prepaid Debit Cards?
While prepaid cards are beneficial for many reasons, they also entail significant limitations compared to standard credit and debit cards, such as:
- No effect on credit history—You can’t use a prepaid debit card to improve your credit score. If building credit is your objective, a better solution would be a secured credit card.
- Myriad of fees—Compared to regular credit or debit cards, prepaid debit cards may incur significantly higher fees. Many prepaid cards come with fees for obtaining and activating the card, inquiring about your balance, reloading your card, making direct deposits, receiving a replacement card, withdrawing money from an ATM (in or out of network), or making certain types of transactions.
- Limited functionality—What you can and cannot do with a prepaid debit card depends on the issuer’s policies. For example, not all prepaid debit card providers allow you to make direct deposits or recurring bill payments with the cards they issue.
Another potential concern of using a prepaid debit card is the danger of your card data being stolen in the instance of an online data breach.
Every time you make an online purchase, you risk your card number being stolen from merchants’ servers by skilled hackers and used for criminal activities such as completing unauthorized transactions or practicing identity theft. Disputing fraudulent charges is a long and arduous process that can take a significant financial and emotional toll on you, so it is best to employ preventative measures to protect your financial data from unauthorized access.
Common Prepaid Debit Card Threats To Watch Out For
According to the Federal Trade Commission (FTC), there were over 40,000 reports of fraud involving gift and reload cards in 2023. Unregistered prepaid debit cards are a common target for fraudsters because they:
- Are easy to obtain
- Don’t entail the same level of fraud monitoring and protection as debit and credit cards
- Don’t come with personally identifiable information
Some fraudsters may tamper with your prepaid cards or clone them after scanning them. Once you add money to the compromised card, they can steal your funds.
Scammers also use many different tactics. For example, they may pretend to be a seller or offer you a reward in exchange for a small fee. They could ask you to buy a gift card and use it as the payment method. Once you share the card number, the scammer can disappear with your money without being traced.
How To Fortify the Security of Your Card and Bank Information?
According to The Nilson Report, payment card fraud losses reached $33.45 billion in 2022. The same report also predicts the losses will exceed $165 billion in the next 10 years.
To prevent becoming part of these bleak statistics, you should protect your financial information during online transactions by:
- Creating strong passwords for online accounts—Assign unique passwords for each online account so you don’t lose access to all of them if one gets compromised. To make passwords resistant to brute force and dictionary attacks, combine uppercase and lowercase letters, symbols, and numbers. You should also enable two-factor authentication (TFA), which will prevent a potential hacker from accessing your account with only your login credentials.
- Avoiding suspicious websites—Look for the “https://” prefix in the URL as it signals a secure connection. If this prefix is missing, it typically means that a scam merchant or individual is behind the suspicious website’s fraudulent activities.
- Using virtual cards—Virtual cards offer robust protection by masking your real card and bank account information during online transactions. Although virtual cards are tied to real funding sources, such as checking accounts or debit card numbers, a potential hacker that infiltrates the merchant’s servers can only access the virtual card information, not your real card and bank account data. Independent virtual card providers, such as Privacy, offer comprehensive control and customization features while protecting your financial information during transactions.
Use Privacy Virtual Cards for Secure Online Purchases
A Privacy Virtual Card has a unique 16-digit number with its CVC code and expiration date, shielding your real debit card or bank account details on merchants’ websites and servers and protecting it from hackers.
To safeguard your financial data during online transactions, Privacy offers three types of virtual cards:
- Merchant Locked Cards—Merchant-Locked Cards can be used repeatedly at a single merchant, which makes them ideal for subscriptions and recurring transactions. If a hacker steals the card number, they won’t be able to use it elsewhere.
- Single-Use Virtual Cards—These cards close moments after the first transaction is completed, rendering them useless to potential hackers. Single-Use Cards are perfect to use on unfamiliar websites whose security practices you are unsure of.
- Category-Locked Cards—These cards “lock” to one category of merchant, such as retail or entertainment. They can’t be used for other types of purchases and present an effective way to manage your spending.
Additional Privacy Features To Help You Manage Your Finances
Besides offering protection, Privacy provides convenience and enables budget management with the following features:
Sign Up for Privacy
To start using Privacy, you must:
- Create an account
- Enter the required Know-Your-Customer (KYC) details
- Connect your checking account or debit card as a funding source
- Request and generate your first Privacy Card
Privacy offers four plans—Personal, Plus, Pro, and Premium. Here is a quick overview of the pricing and features of each plan:
