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Banking: How Prepaid Cards Work

Provided by Visa, Content Partner for the SME Toolkit

What is a Prepaid Card?
Like debit and credit cards, prepaid cards allow you to make purchases without cash or checks. Unlike credit cards, you cannot take on debt with a prepaid card, and unlike debit cards, prepaid cards are not linked to a bank account. A prepaid card has a zero balance until you add money to it.

How Prepaid Cards Work
When you make a purchase with a prepaid card, the amount is subtracted from the balance of the card. Once the balance reaches zero, the card is empty. It can then be discarded, unless it is a reloadable card, in which case you can add funds and continue using it.

With Prepaid Cards You Can:

  • Make purchases in person, online, or by phone
  • Give gifts to friends and family
  • Withdraw cash from an ATM or bank
  • Receive wages or funds by direct deposit to the card
  • Pay bills


Kinds of Prepaid Cards

OPEN loop vs. CLOSED loop The two main types of prepaid cards are open loop and closed loop cards. Closed loop cards are merchant-specific, used for transactions exclusively at a particular merchant's locations. An open loop card is associated with and bears the logo of an electronic payment network, such as Visa; open loop cards are honored wherever these networks are accepted.

Reloadable cards. A reloadable prepaid card is one that lets you add funds after your initial purchase. Teen cards, Travel cards, and Payroll cards are often reloadable.

Gift cards. These non-reloadable prepaid cards can be given as gifts and used until the balance is zero.

Teen cards. Parents can teach teens financial responsibility while monitoring their spending with teen cards.

Travel cards. Travel cards are a safe alternative to cash and travelers checks. Some cards offer lost luggage reimbursement, emergency card replacement, and zero liability for lost or stolen cards.

Payroll cards. A payroll card is an alternative to traditional payroll methods in which an employee’s income is credited directly to his or her card.


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