No, they’re not the same! The principle difference between prepaid cards, debit cards, and credit cards lies in how you pay for the transactions these cards facilitate. Each card makes your life easier, but each is distinct in how it operates.
How Prepaid Cards Work
Prepaid cards generally require users to send cash to be deposited into an account. These funds are not available for your use but act as collateral and, if you fail to pay your payments, you risk losing all or a portion of your deposited amount. With some accounts, these monies on deposit earn a moderate amount of interest, with others they earn nothing. A prepaid card is NOT a credit card.
Does a prepaid card have a limit?
With a prepaid card, your “limit” is generally the amount you originally sent in.
Do I have to make payments on a prepaid card?
Yes, you do. The amount you sent to the card issuer is meant to be back-up, collateral, or insurance against default. It isn’t meant to be drawn down nor is it available for your use while you remain a card user.
Do prepaid cards report to credit bureaus?
Many do, but others do not. A prepaid card is a good way to rebuild your credit after you’ve been through a personal financial crisis so if you need to rebuild your credit, make certain your issuer reports to all three credit bureaus.
How do I know the issuer is reporting this information?
Get your free credit report from each of the three bureaus at www.annualcreditreport.com and be sure to check your triple credit score (for free) at GoFreeCredit.com.
Where can I get the best prepaid card?
One of the best prepaid cards is the Prepaid Visa® RushCard. When you enroll in their FREE RushPath to Credit and make recurring deposits and payments using your RushCard, your transaction information will be reported to participating consumer credit reporting agencies, helping you build a better credit history.
Apply for the Prepaid RushCard HERE!
How Debit Cards Work
Debit cards are essentially plastic checks. They’re linked to your bank checking account and though they may look like credit cards because of the logos imprinted on them, they are not credit cards.
Do debit cards have a limit?
Yes. The limit is generally either the amount you have available in your checking account or a pre-determined amount set by you or your bank. Having a pre-set limit on daily transactions prevents fraud.
Do I have to make payments on a debit card?
No, but to use your debit card, you will have to make deposits into your checking account.
Do debit cards report to credit bureaus?
No, not to my knowledge, but it wouldn’t surprise me if a reader corrected me on this! The reason is that there is no credit issued.
Where can I get the best debit card?
One word: PerkStreet. Their debit card rewards program pays participants between 1% and 2% on all transactions with up to 5% cash back rewards in rotating categories that change each month. There are some limits on the 5% cash back program but the 1% or 2% program is currently unlimited. Spend $40,000 each year with your Perkstreet Debit Card and you could get as much as $800 or more back in their rewards program. Check out their site for complete details.
Sign up for PerkStreet’s Rewards Checking Account HERE!
How Credit Cards Work
Ah, the nemesis of Dave Ramsey fans everywhere … the evil CREDIT CARD!
Credit cards are exactly what they say, cards that issue credit to the holder at the time a purchase is made. Credit cards are said to be “revolving” credit because as soon as you pay it off, you can use that credit again (provided you paid within the terms of the agreement).
Credit card companies make money two ways: 1) by charging the merchant a “premium” of up to 5% of the total purchase. Charge $100 and the merchant may only get reimbursed $95 from the card issuer. 2) interest, fees, and penalties assessed on their cardholders. The longer you take to pay off your credit card, the more you’ll pay over time.
Do credit cards have a limit?
You better believe it. Exceed this limit and you’ll subject yourself to a plethora of fees and other charges. ALWAYS know your limit and know your balance when it comes to credit cards!
Do I have to make payments on a credit card?
You better believe it … again. Payments on credit cards are where the card issuer makes the most amount of money.
Do credit cards report to credit bureaus?
Yes, but somehow the good information they collect doesn’t seem to make it to the credit bureaus nearly as fast as the bad information.
How do I know the issuer is reporting this information?
Again, you can get your free credit report from each of the three bureaus at www.annualcreditreport.com and then be sure to check your triple credit score (for free) at GoFreeCredit.com.
Where can I get the best credit card?
There are two primary sources for credit cards that I generally recommend:
- Discover Card– mostly because they have a fantastic cash back rewards program and are constantly innovating to stay ahead of the competition. Plus no annual fee!
- American Express – their TrueEarnings(R) Card from Costco is designed for Costco members who have just average credit and plan to take advantage of the cash back rewards program. The cash rebate amount varies according to where the cardholder makes the purchase; 1% is earned on general purchases, 2% is earned for travel-related purchases, and 3% is earned for restaurant and on gasoline purchases up to $3000 (1% thereafter). There is no limit to the amount of cash rebates that can be earned. There is no annual fee with a paid Costco membership.
Apply for the TrueEarnings(R) Card from Costco and American Express HERE!
Which card is right for you?
When it comes to prepaid cards, debit cards, and credit cards, there is no easy answer. Which one is best for you will depend on your own personal financial situation, your maturity level, your comfort level with credit, and your own personal preference in dealing with your own finances.
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I dislike credit very much, it always has a way to get you back. I like the prepaid because it’s so simple, put money on, take money out, and not many fee’s. The debit card is okay, I had it, but it was just easier to only use the prepaid.
Hi Ron, great article! I suppose a lot of people can now have a clear understanding what these cards mean. In the Philippines (where I am from), it is very difficult to get a credit card. You need to have at least a thousand dollars or so in the bank, or a steady income stream. Debits cards on the on the other hand are easy to obtain. Thanks for the advises, I thoroughly enjoyed reading your articles.
I’m confused by your description of prepaid cards… if, as you say, the “deposit” amount isn’t drawn down, then this seems more like a charge card (if balance must be paid in full) or a credit card (if only a minimum balance due is required to be paid) with credit limit = your deposited amount . I thought giftcard-like products or products like Serve by American Express represent the prepaid category… whereby you have paid in a certain amount, which represents your spendable limit (i.e., you have “prepaid” it). In the case of giftcards, once spent the account is effectively closed… or on a reloadable (like Serve) the account stays active and may be replenished?
With a pre-paid card, your deposit simply acts as collateral. Think of it like pawning a diamond ring … the ring is kept by the pawn shop, but you’re given money to use for a period of time. But whereas with a pawn shop, you only make one payment at the end of the agreed upon term, with a prepaid card, your credit is revolving. A pawn shop may agree to “revolve” your credit as well, but typically they want their cash back. You may be able to “up your limit” by depositing more collateral with a prepaid card.
The reason a prepaid card isn’t a charge card is because with a charge card, the only collateral is your good name and credit score. Charge cards are paid in full at the end of each month (like with American Express), but a prepaid card can be paid in installments over time, just like a regular credit card.
The difference between a prepaid card and a regular credit card is that a prepaid card wants collateral and a regular credit card doesn’t.