The difference between prepaid debit cards and gift cards

Saturday, January 03, 2015

Understanding key differences in card options

Prepaid debit cards and gift cards are popular gifts to give, whether for a particular milestone (like a graduation or birthday) or a holiday gift. Giving a prepaid card or a card designated for use with a specific amount of money is more practical than giving cash. Cash can easily be lost and more difficult to track for use with certain purchases.

However, whether you give a prepaid debit card or a gift card, it is essential to know that they are not the same thing. This article will provide an overview of each card type, the functionality of each card type, the process for activation, and the benefits for the cardholders.

What is a prepaid debit card?

Prepaid debit cards work by loading a specific amount of money onto the card. Unlike gift cards, the prepaid card operates like a debit card without being tied to an active bank account. You can withdraw money from an ATM, complete transactions at various retailers, and potentially have more card security than you might have with a gift card.

Many prepaid debit cards are associated with larger financial institutions, like Visa, Mastercard, Discover, or American Express. For example, Visa prepaid cards are covered by Visa’s Zero Liability policy. This policy ensures that cardholders aren’t held responsible for fraudulent purchases. Still, not every prepaid debit card may offer the same level of security, so it is important to know what policies come with your prepaid debit card.

Prepaid debit cards are often reloadable, meaning that you can add money back to them over periods of time. This is a feature that attracts many users so that they can add money to their card when they need to pay bills and avoid overspending, especially since most prepaid debit cards don’t come with an expiration date. However, even with regular usage, you won’t go through the same processes that come with using a credit card. For a credit card, a user application has to be completed along with a credit check to determine if the user meets credit score requirements. So, when using a prepaid debit card, you can use the card on an ongoing basis, but without building credit, impacting your credit report, or increasing your credit score.

One factor to bear in mind when using a prepaid debit card is that there can be fees associated with usage. Fees can be applied when you access the card (considered an activation fee) or from regular use (a monthly maintenance fee). Annual fees can range from $12 - $120 per year.

What is a gift card?

Prepaid gift cards are also loaded with a pre-set amount. However, there are more limitations on where cardholders can use the gift card. Typically, the gift card is purchased at a retail location solely for use at that particular company. You can use the card at different locations of the same retailer, but you wouldn’t be able to use the car at a store or brand outside of the card issuer.

If you are able to register your gift card, you may have more protection if your card is lost or stolen. However, if the card is stolen or lost and unregistered, you will unlikely receive any compensation or additional coverage from the retailer. Unlike a prepaid debit card, you can typically use gift cards until the amount of funds available is completed. Some retailers may offer the ability to reload, but this is less common than prepaid debit cards. Gift cards also often have expiration dates that limit the availability of the cardholder to use the card after a given period of time. Additionally, you cannot use a gift card for an ATM withdrawal, so there are more limitations in how the cardholder uses the funds.

One of the primary benefits of gift cards is that they don’t come with the same level of fees as prepaid debit cards. Instead of having to worry about monthly fees, you can use your card freely and access a certain amount of funds. If you know the amount of funds available on your gift card, you can practice budgeting and plan how you’d like to spend the gift card ahead of time.

Choosing the right card for you

Ultimately, prepaid debit cards and gift cards offer similar products but come with different pros and cons. Both cards allow users to have access to certain levels of funds, making them a great gift at any time of the year. When purchasing either of these cards, it is essential to consider your priorities, especially understanding how it will be used and what function you would like out of the card.


Next steps

Are you looking to take the next steps in determining offerings for prepaid debit cards or gift cards at your business? Are you in need of a solution to help your business determine the benefits of different card types?

Heartland is ready to help.

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at heartland.us