Prepaid Cards vs. Gift Cards: What's the Difference?

Prepaid Cards vs. Gift Cards: An Overview

Prepaid cards and gift cards are both pieces of plastic that can be used to make purchases. They make popular presents as well: A versatile way to give a recipient the funds to buy whatever they like that seems safer and a touch classier than a wad of cash, and more convenient than a personal check. The biggest difference between the two reflects their permanence: prepaid cards can be reloaded and used indefinitely, while gift cards can generally only be used until the dollar amount on them is exhausted.

What Is a Prepaid Card?

Prepaid cards are technically a type of debit card. Issued by a financial institution or credit card company—Visa, MasterCard, and Discover all offer them—they are deposited or "loaded" with a certain amount of money. They then can be used in person or online to purchase items or pay bills. They can also be used at ATMs to withdraw cash.

Just like regular credit cards, prepaid credit cards have a number and an expiration date printed on the front or back, and they generally can be used in the same places. The amount of money deposited or "loaded" onto the card represents the card's credit limit—that is, how much can be charged on it. Once the balance on the card had been exhausted, the card is worthless, unless more funds are deposited on it. In fact, a prepaid debit card can be used repeatedly, so long as the cardholder keeps adding money to the card. It may carry a monthly fee, however.

Although the terms are often used interchangeably, these prepaid cards are not the same as prepaid credit cards. Requiring an application, a credit check, and approval from the issuer, a prepaid credit card functions like a regular credit card: the cardholder can maintain an outstanding balance, receives monthly statements, etc. The key difference is that approval for the card is contingent on a security deposit—collateral for the issuer, in case the cardholder falls delinquent in their payments.

What Is a Gift Card?

A gift card is also a type of stored value card loaded with funds for future discretionary use. Only it contains a specific amount of money. Once this sum is spent, the card can no longer be used. Gift cards also have expiration dates, which are often much shorter than that of prepaid cards.

Gift cards—also known as stored value cards—can be purchased in several different formats. The most familiar type is what's technically known as a closed-loop card: It is good only at a particular merchant or certain retailer and bears that outfit's name and logo. Some retail groups will allow the same gift card to be used at any of their affiliated stores.

Gift cards began with specific stores. Now, however, many of the major charge or credit card issuers, like American Express, Visa, Discover, and MasterCard, are also offering gift cards, good anywhere the regular plastic is accepted. Known as open-loop cards, these are most easily confused with prepaid debit cards, especially since some of them are reloadable as well. These cards may carry a one-time activation fee.

Key Differences

The table above summarizes some of the primary differences between a prepaid card and a gift card. At its crux, there are fundamental differences on the intention behind how gift cards and prepaid cards are to be used. In many instances, gift cards may be more commonly acquired to gift to someone else while a prepaid card may be more suitable for personal use.

Gift cards are typically limited to a single store or set of stores, but prepaid cards can be used anyplace that supports the electronic payment network such as Visa or Mastercard. Therefore, prepaid cards are often more versatile.

There may also be different costs associated with each type of card, though this does hinge on the issuing company or entity. Gift cards may have activation, maintenance, or inactivity costs, whereas prepaid cards may have activation, monthly maintenance, and transaction fees. In most cases, you're able to reload prepaid cards while gift cards may or may not be able to be reloaded.

The last primary difference between gift cards and prepaid cards. Gift cards may have an expiration date after which the remaining balance is lost, but prepaid cards do not usually have an expiration date but may have a monthly maintenance cost after a specified amount of time. In addition, a gift card is tied to a specific company that may go bankrupt which would hinder the ability to use the gift card.

The Bottom Line

Gift cards and prepaid cards are both payment cards that can be loaded with a set amount of money. There are fundamental differences between how a gift card may be used with a specific company and how a prepaid card may only be used at merchants that accept that specific payment method.