For many of us, prepaid banking cards provide a good alternative to traditional bank or credit union accounts. In fact, at least 2.4 million U.S. households use them. These cards offer enhanced security, convenience, and spending control.

However, they also can have fees and other downsides. Each card has different terms of use—so it’s important to do some research before deciding which option is right for you. We cover it all below.

What is a prepaid banking card?

A prepaid banking card is a type of payment card preloaded with a specific amount of money. You can use it to make purchases or withdraw cash up to the available balance. This type of card works similarly to a debit card, but it’s not linked to a bank account. Once you use all the funds on the card, you can add more money to it (depending on the card's terms).

*As long as the card has a network logo like Visa, Mastercard, or American Express.

You even can use some prepaid cards at ATMs to withdraw cash. This depends on the terms and conditions of the card. And, some locations or services may restrict prepaid card use, so be sure to check with the merchant in advance.

What are the different types of prepaid banking cards?

There are many types of prepaid banking cards, including:

• Federal government-issued cards such as Direct Express®, developed exclusively for people who receive federal benefits (e.g., Social Security, Supplemental Security Income (SSI), veterans’ benefits)
• Electronic benefits transfer (EBT) cards, which are state-issued government benefits cards (e.g., for SNAP/food stamps, TANF)
• Commercial prepaid debit cards, which typically carry a network logo (like Visa, MasterCard, American Express, or Discover) and look like a normal credit or debit card
• Gift cards from retail stores, which have a fixed amount and cannot be re-loaded

What are the benefits of using a prepaid banking card?

Prepaid cards offer several benefits compared to using traditional debit and credit cards or checks:

Tips for using prepaid banking cards

NCOA has developed these tips for using, managing, and protecting your prepaid debit cards.

How to manage your government benefits card

1. Look closely at the fee summary
Fees can be hidden and add up quickly. Know what extra charges, if any, your card has and when they apply. This help you use it wisely.

2. Use an ATM in the Direct Express® card network
There are approximately 75,000 ATMs nationwide in the Direct Express card network. When you use these machines, you get one fee-free cash withdrawal each month.

3. Make store payments with your Direct Express® card
Avoid ATM fees by paying for purchases in stores with your card.

4. Get cash back for free in stores
When you make a purchase using your PIN number at grocery stores and many other places, you have the option to get cash back for free.

5. Get cash from certain banks free of charge
Go to any bank or credit union that displays the MasterCard acceptance mark and get cash from a teller free of charge.

How to manage other prepaid cards

1. Shop around
Many different prepaid cards are available to retirees. Take the time to explore the options and understand the fees and costs of each card. And don’t hesitate to comparison shop.

2. Check the card agreement for fees
At some stores, paying with a prepaid debit card might provide the option to run the card as “credit” or “debit.” Some prepaid cards charge you a higher fee if you choose debit. Be sure to review the card agreement to understand all fees, as the money will come out of the prepaid card account either way.

3. Contact the card provider right away if your card or PIN is lost or stolen
Your rights to recover money taken from your prepaid card account depend on the type of card, the contract, and how quickly you report the loss. Generally, payroll cards and government benefits cards are protected under the same rules that protect your bank debit card. The federal Direct Express® card provides similar protections by contract.

MasterCard or Visa prepaid debit cards usually give some protection but check the card provider’s website for specifics. If the card that was lost or stolen was a gift card for just one store or retail group, your ability to recover any money will depend on the retailer’s policies and on whether you registered the card.

4. Don’t use prepaid cards for gas, hotels, or rental cars
Some prepaid cards can incur an additional charge at a gas station, hotel, or rental car agency. This is because these transactions can take a few days to process. In the meantime, a temporary hold for a larger amount may be placed on your card (this ensures there is money to cover the full potential charge). Once the transaction is processed, the temporary hold is removed, and the held money returns to your card. Using a prepaid card to buy gas, hotel reservations, or rental cars may restrict access to your funds in addition to the purchase for several days.

5. Don’t use gift cards for anything other than gifts
Gift cards appeal to scammers because most people can easily get them—but they come with fewer protections for the purchaser. What's more, scammers can typically spend gift card funds with minimal risk of getting caught. The basic rule of thumb to keep in mind is that gift cards are for gifts only; you should never use them to pay a bill or a fee. Get more tips on avoiding common scams.

Download our Savvy Saving Seniors® handbook to learn more about using prepaid cards to better manage your money.

The bottom line

Prepaid banking cards offer a convenient, accessible, and secure way to make purchases instead of using cash. Direct Express® federal benefits cards, Electronic Benefits Transfer (EBT) cards, prepaid debit cards, and retailer gift cards are among the most common. They also can be effective money-management tools in retirement. Because they’re not linked to your bank account(s), you can’t spend more than you have or intend. Be aware, though: many cards charge fees and there are some instances where you should avoid using them. Reading the terms and conditions closely helps you use your card wisely.