Are you looking for ways to better manage and protect your money? You might consider whether government-issued or prepaid debit cards are right for you.

When you use these cards to make purchases, pay bills, and withdraw cash, you can’t accidentally overdraw your funds, or impulsively spend more than you had planned to. That’s because you’re limited to using the money that’s already loaded onto them.

“Many older adults rely on prepaid cards to gain—and maintain—better control over their finances,” said Jessica Johnston, NCOA's Senior Director for the Center for Economic Well-Being.

Unlike with traditional debit and credit cards, prepaid versions automatically prevent users from spending above their means. This makes them highly effective money and debt management tools for nearly everyone—especially those who live on a tight budget, or who struggle to stick to one,” she said.

Here’s what you need to know before adding one or more prepaid cards to your own money management strategy.

What is a prepaid debit card?

A prepaid debit card looks and functions much like a traditional debit or credit card, with one notable exception: it has a defined spending limit that you cannot exceed.

That distinction is important. When you use a debit card that’s linked to one or more of your bank accounts, you typically can access all of the money in those accounts. (This is true even if there’s a daily limit on your cash withdrawals.) And when you use a credit card, you can spend as much as you want whenever you want, up to the limit set by the financial institution that issued the card. With a prepaid card, you can only spend what you or someone else previously loaded onto it.

There are many types of prepaid debit cards, and the features, benefits, fees, and protections vary for each. The most common ones include:

• Government benefit cards. Federal and state agencies often issue these cards when paying certain benefits, such as Social Security, unemployment insurance, and Supplemental Nutrition Assistance Program (SNAP).
• General-purpose reloadable cards (GPRs). These look just like traditional debit or credit cards, and most carry a “network” logo like Visa, MasterCard, American Express, or Discover. GPRs are “open-loop” cards, which means you can use them anywhere that accepts payment from that network.
• Retail cards. You might think of these as gift cards. Retail cards are “closed-loop” cards, which means you can only use them at the store, group of stores, or location (like public transit) that issued the card. Most closed-loop cards do not carry a network logo.

With the exception of government benefit cards, most prepaid cards are available for purchase online or in stores.

How do prepaid debit cards work?

Using a prepaid card is simple. First, you “load” (add) a specific amount of money onto the card by paying in advance. Then, you use the card to spend it. For example, you can:

• Buy groceries
• Fill up your gas tank
• Pay your utility bills online or over the phone
• Order a cashier’s check to cover expenses, like rent, when you can’t use a card

You can’t spend more than the amount of money you loaded onto the card. However, in most instances, you can “re-load” the card (add more money) at any time.

Why should seniors consider prepaid debit cards?

By now, you may be wondering, “Is a prepaid debit card right for me?”

The answer depends on your individual financial situation, spending habits, and preferences. Here are some questions to consider as you weigh your decision:

❓Do I have trouble sticking to a budget?

If so, a prepaid card can keep you honest. If you tend to lose track of what you’ve spent, spend more than you intend on items you’ve budgeted for, or regularly buy things on credit that you don’t need and can’t pay for, then a prepaid card can put a stop to all three. (See also: What is envelope budgeting?) 

❓Do I have poor credit?

It can happen to the best of us. Unfortunately, if you do have poor credit, you probably won’t qualify for credit cards and the convenience that comes with them. That’s because financial institutions don’t want to assume the risk that you won’t pay your balance(s).

With a prepaid card, no one will check your credit report. As long as you have funds to load onto it, you’re free to have and use one just like a traditional debit or credit card. In an age where cash is no longer king, you won’t have to worry about how you’ll pay for your purchases and expenses.

❓Do I have a lot of debt? Am I worried about adding more?

If so, you’re not alone. According to the Bureau of Labor Statistics, retirees now outspend their annual incomes by more than $4,000.¹ And for many of them, the only way to bridge that gap is to use credit cards.

Prepaid cards won’t address the underlying economic factors that contribute to this growing issue, of course. But they can help with managing your own debt. When you replace your traditional card(s) with prepaid ones, you can’t run up balances that you don’t have the money to pay for. You also won’t accrue late fees and interest charges on those balances. (See also: Getting help with credit card debt)

I’m ready for a prepaid debit card. Where do I begin?

Before you choose your prepaid card, it’s important to consider your reasons for getting one. That’s because many prepaid cards include hidden fees for specific uses, such as withdrawing cash from an ATM, paying bills online, making in-store purchases, and even just having the card in the first place.

The Consumer Financial Protection Bureau advises that you should:

• Think about how you plan to use the card(s). Some cards include a “dormancy fee,” which means you’ll pay extra if you don’t use it. Others charge a transaction fee every time you do use it.
• Look at the fees associated with using the card(s). These can vary widely depending on who issues the card. Check these fees against your anticipated uses to see which best matches your needs.
• Comparison shop. In general, the packaging and/or website for each prepaid card includes information about common fees and other key information.

Remember: just because a prepaid card appears cheaper to use than a traditional credit or debit card, doesn’t mean that it is. Always be sure to research the fees, including whether or not you will be charged more if you choose to use your card as a debit rather than credit at the point of sale.