What is a prepaid card? Differences from credit and debit cards

Key takeaways:

• Prepaid cards draw funds from a preloaded balance rather than linking to a bank account or credit line. You must load money onto the card before it can be used.

• They function like debit or credit cards for payments but don’t offer credit, helping prevent overspending and protecting personal credit.

• Prepaid cards are useful for budgeting, security, and separating business from personal expenses. Because they’re not tied to personal bank accounts, they can reduce fraud risks and provide more control over employee spend.

Between 2012 and 2021, the average number of digital payments per person increased by 85%,¹ highlighting the growing demand for convenient and secure payment methods, especially for businesses that need flexible spend solutions.

Prepaid cards are a digital alternative to debit and credit cards. They rely on a preloaded balance and don’t offer features like rewards or cash back that come with corporate credit cards.

The key difference is that prepaid cards are not connected to a bank account or credit facility. You can only spend what’s been loaded onto them, making them a practical choice for managing budgets and limiting risk.

What is a prepaid card?

A prepaid card is a type of debit card that lets you pay using a preloaded balance, rather than drawing funds from a bank account or credit line. You load money onto the card in advance and use it for purchases or cash withdrawals, up to the available balance.

There are different types of prepaid cards, including prepaid credit cards, which function similarly but are not linked to a bank account or credit line.

Depending on the card issuer, prepaid cards can be used at point-of-sale terminals, for online shopping, or to withdraw cash from ATMs. They’re typically issued by financial institutions or fintech platforms and run on major networks like Visa or Mastercard.

Businesses often use prepaid cards to manage employee spending – issuing individual cards, setting spend limits, and tracking usage in real time.

When does a prepaid card make sense?

• You want tighter control over budgeting and spend limits

• You want to avoid tying payments to your main business or personal bank account

• You need a simple way to manage employee purchases or team expenses

• You're looking for a debit card alternative without credit checks or borrowing

Prepaid cards vs. credit and debit cards

The key difference between these card types is how transactions are funded.

• Prepaid cards are loaded with funds in advance and not connected to a bank account or credit line.

• Debit cards are directly linked to a bank account, drawing funds from it as you spend.

• Credit cards allow you to borrow funds up to a credit limit, which you repay later.

Because prepaid cards aren’t connected to your main business or personal bank account, they help limit spending and reduce exposure in the event of loss or fraud, since the card only holds a finite balance.

Providers like Airwallex offer single- and multi-use virtual debit cards. These offer spending control similar to prepaid cards, with additional fraud protections and security features like programmable limits, expiration dates, and usage restrictions. You can issue and cancel cards instantly, and if your business holds multi-currency balances, you can spend in those currencies without incurring foreign exchange fees.

In contrast, traditional business debit and credit cards are connected to your business's primary banking details. While this can introduce more risk, these cards are also governed by robust consumer protection regulations, such as those from the U.S. Consumer Financial Protection Bureau (CFPB) or the UK Financial Conduct Authority (FCA).

Credit cards can also be used to build a credit history for your business. Responsible use – such as on-time payments and keeping balances low – can positively impact your credit profile over time.

Note: Prepaid cards do not involve borrowing money or incur interest charges, unlike credit cards.

Secured credit cards are a useful option for individuals with little or poor credit who want to build or rebuild their credit histories. These cards require a refundable security deposit and report your activity to credit bureaus, helping improve your credit score over time.

In contrast, prepaid cards do not affect your credit score or history, as they are not linked to a credit line and their activity is not reported to credit bureaus.

It’s important to check your credit report regularly to monitor your financial health and track any changes to your credit profile.

How do prepaid cards work?

Prepaid cards are simple. First, you choose a card and a dollar amount you want to preload for spending. To use a prepaid debit card, you need to load money before making any transactions – this is typically done at the time of purchase or through various reload methods. You’ll pay the preloaded amount plus any applicable card opening or activation fees. Then, your prepaid card is loaded with the approved amount and is ready for purchases almost instantly. Money moves onto the card through initial loading or reloads, and if you need to continue using the card, you can add more funds as needed.

Once the card is loaded, you can make purchases in person and online to complete business or personal expenses, just like a credit or debit card. Some prepaid cards allow international payments, though there may be foreign transaction fees depending on the card issuer. Prepaid debit cards can be used at POS systems for goods and services, as well as for online purchases and paying bills. They are also helpful for managing spending and keeping expenses within a set limit.

You can purchase prepaid physical and virtual cards online and in person at grocery stores and convenience stores. Prepaid debit cards are widely available at retail locations and can often be reloaded at participating stores. Many cards also allow you to reload the card online or set up direct deposit for convenient access to funds. Prepaid cards can help you manage money, control spending, and avoid overspending. However, this process must be repeated each time funds run out, which can become inefficient over time.

Prepaid card alternatives

Businesses like the transparency and control that prepaid cards offer. However, prepaid cards have limitations, such as limited rewards, fewer protections, and potential usage restrictions. In some cases, a credit or debit card may be more suitable, especially for larger or recurring purchases.

• Secured credit cards require a refundable cash deposit and are a good alternative for people with limited or poor credit who may not qualify for traditional credit cards. Issuers like Visa and Discover offer both secured and prepaid options, with secured cards helping build credit when payments are reported to credit bureaus.

• Credit unions often provide prepaid and secured card options with lower fees, and may offer financial education to support better money management.

• International business debit cards are a flexible alternative for companies that need to manage spending across multiple currencies. These cards are typically linked to a business account and allow real-time spend tracking and foreign currency transactions.

• Virtual credit and debit cards allow businesses to create single-use or multi-use cards for employees or departments. These cards can enhance security, simplify expense tracking, and eliminate the need for reimbursements.

Prepaid cards and their alternatives can also be used to pay bills, offering a secure and digital way to manage recurring payments and control spending.

How to choose the right card for your business

All cards have different rules and requirements depending on the card type and provider. Some have perks like free ATM withdrawals, while others charge inactivity fees.

When choosing a card, compare different options to find the best deal for your business. Here’s a rundown of key features to pay attention to:

Card perks:

• Liability protections

• Cashback rewards

• Expense management tools

• Ability to assign cards for specific uses or team members

• Customizable spending controls

• Multi-currency support (where applicable)

Common fees:

• Monthly maintenance or service fees (these can reduce your balance – look for cards with low or no monthly fees)

• Prepaid card reload fees

• ATM withdrawal fees (can vary by provider)

• Foreign transaction fees

• Inactivity fees

Note: Prepaid cards generally do not allow overdrafts, but credit or debit cards may.

It's also important to consider the card’s expiration date and any included security protections. If your prepaid card expires, you can usually request a replacement card, though a cost may apply, or use alternative methods to access your remaining funds. Prepaid cards are eligible for FDIC deposit insurance coverage if the card issuer is FDIC-insured and your card is properly registered.

Credit and debit cards have these additional protections built in. If you’re looking for credit, debit, or virtual card options, there are also more business-specific cards available.

Prepaid cards: Frequently asked questions

Do prepaid cards expire?

Yes, prepaid cards typically come with an expiration date, usually valid for a few years. However, the funds themselves do not expire. If your card is nearing expiration and still active, the card issuer may automatically send a replacement. You can also contact the issuer to transfer the remaining balance or request a refund.

How much money can you put on a prepaid card?

Prepaid card limits vary by issuer. While some business or specialty cards may allow balances of $20,000 or more, most consumer-focused cards have lower limits, typically ranging from $3,000 to $10,000. Additionally, many cards have daily spending and loading limits, which may impact how you use the card.

What are the benefits of prepaid cards?

Prepaid cards are useful for managing business or personal spending without linking to a credit line or bank account. They allow you to set spending limits with preloaded balances, and some issuers support employee cards with individual controls. Since prepaid cards aren’t tied to personal bank details, they can offer an added layer of security in case of loss or theft. No credit check or security deposit is required to open most prepaid cards.

What are the disadvantages of prepaid cards?

Prepaid cards can carry multiple fees, such as monthly maintenance, reload, ATM withdrawal, and inactivity charges. They also don’t build credit, since your usage isn't reported to credit bureaus. And while FDIC-insured banks issue some, consumer protections on prepaid cards are generally more limited than those offered on traditional credit or debit cards.

Stay flexible with virtual business debit cards

Prepaid cards are a credit-free way to control business spending, but they may not scale well for larger operations. Frequent reloading and multiple fees can add up quickly.

Instead, consider solutions like the Airwallex Business Account and Corporate Cards. With built-in expense management, multi-currency capabilities, and no foreign transaction fees, Airwallex offers a smarter way to pay globally, issue employee cards, and manage spend in real time.

Sources

1. https://www.bis.org/statistics/payment_stats/commentary2301.pdf