Prepaid cards come in a number of varieties. To understand the different varieties, it helps to understand how each type works.
The two main types of prepaid debit cards are: “open loop” and “closed loop” cards. A closed loop prepaid card is merchant specific and can only be used when shopping at that merchant’s retail location (for example, a JC Penny prepaid card can only be used at JC Penny stores or on the JC Penny Internet site).
An open loop prepaid card, on the other hand, is associated with a certain electronic payment network (such as Visa, MasterCard, American Express, or Discover). You can tell if a prepaid card is an “open loop” card by looking at it – does it have the logo of Visa, MasterCard, American Express or Discover on it? If so, it is likely an open loop card. So long as you have sufficient funds on the card, you can use the card at any retailer that accepts cards from that network.
Many closed loop cards are also referred to as “gift cards”. Gift cards are typically both closed loop and non-reloadable – that is, you can only use the card up to the amount originally loaded on the card. If the card was originally valued at $50, you can only spend $50 (and you can’t add additional funds onto the card).
On the other hand, a reloadable prepaid card lets you add funds later on, so you can still continue using your card. Reloadable prepaid card types include: prepaid debit cards, teen cards, travel cards and payroll cards. Teen cards are a good way for parents to start teaching their children about money and financial responsibility. Travel cards are a great alternative to cash and traveler’s checks, with some even offering some reimbursement for lost luggage, emergency card replacement, and zero liability when your card is lost or stolen. Payroll cards are an alternative for employers and government agencies, where wages are directly deposited to the employee’s account.
Another type of prepaid debit card is a healthcare card, which is a specific type of debit card that gives you access to health benefits accounts. With this type of card, a portion of the employee’s salary is automatically deducted to pay for qualified medical expenses.