By Jason Steele

2014-11-03

5 Min. To Read

* Editorial Disclaimer

This post may contain references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. The content or opinions contained within this post come from third party journalists or members of the CreditCardReviews.com Editorial Team and are not supplied by any of our partners.

In the payment industry, there is nothing hotter than the trend towards prepaid debit cards. Major companies issue them, the Millennial generation uses them, and celebrities endorse them, but how do their features and benefits stack up against standard credit cards?

The key attribute of prepaid cards is the fact that it is impossible for cardholders to use them to incur debt. As their name implies, these cards must be funded in advance, and there is no way for charges to be approved in excess of their existing balance.

In addition, prepaid cards can replicate many of the functions of a bank account. For example, prepaid debit card accounts accept direct deposits, can issue bill payments, and can have cash deposited at large networks of retail stores.

Yet when compared to credit cards, prepaid cards have numerous disadvantages. For example, credit card users are protected by the Fair Credit Billing Act which means that cardholders can never be responsible for more than $50 in fraudulent transactions, although most card issuers offer customers zero liability. Under this law, credit card users can even request a refund, called a chargeback, when a transaction is authorized, but a merchant fails to deliver promised goods and services, or even if it does so in an unsatisfactory manner. In contrast, once a transaction is authorized using a prepaid card, the card issuer cannot offer any remedies if the merchant fails to deliver or the cardholder is unsatisfied. In addition, even a fraudulent transaction processed to a prepaid card results in a loss of funds until the matter is investigated and resolved. However, a fraudulent credit card transaction only results in a temporary loss of one's credit limit, and a temporary credit can be immediately issued when the cardholder disputes a charge.

Furthermore, credit cards offer significant benefits to travelers over prepaid cards. For example, guests at a hotel often must place several hundreds of dollars on deposit when renting a room, to secure against charges to the room or damage. With a prepaid card, a hold is placed on the account's available funds, while a credit card user just has a temporary authorization placed on his or her account.

It is also much harder to rent a car with a prepaid card than it is with a credit card. As with hotels, rental car agencies will need to place a large hold on the prepaid cardholder's account, and see proof of insurance and other documents. On the other hand, credit card users merely authorized their card to be charged in the event of damage, and most credit cards offer a form of rental car insurance. Finally, gas stations will place large holds on prepaid cards that can freeze funds for days, while credit card transaction face no such difficulties.

Credit cards can also offer valuable rewards in the form of points, miles, or cash back, while prepaid debit cards never do. In fact, most prepaid debit cards require some sort of fees in the form of monthly fees or cash loading fees, while there are many no-fee credit cards available.

In the end, many people who understand the advantages of credit cards still use prepaid debit cards as a fool proof way to avoid debt and interest charges. Yet for those who are able to avoid incurring interest by paying their credit card bill in full every month, credit cards will always be clearly superior to the latest trend in prepaid products.

Table of Contents