What is the Difference Between a Prepaid Card, a Debit Card and a Credit Card?

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In the digitalized era, electronic payment methods have significantly revolutionized the way we use money. One swipe and the world is your oyster. Not only has it made our transactions faster and efficient, it has also made electronic payment rewarding. One gets ample of benefits for just paying money through digital mediums. Exclusive deals allow users to make the most of their spendings. These staple features of most cashless transactions have made online shopping a dream. One can shop to their heart’s fill from the comfort of their homes, while enjoying great deals and discounts. If for some reason however, you don’t like what you ordered, you can return or even exchange it without any hassle.

Electronic modes of payment have thus become the norm in every part of the world. The same is true for the UAE too. In the United Arab Emirates there are primarily three types of cards to choose from namely, prepaid card, credit card and debit card. To choose one amongst these is possible only by carefully evaluating the multiple benefits and disadvantages each one of them carries. This way one can easily pick the one that best meets their requirements.

Here is a breakdown of what each of these cards offer:

What is a Prepaid Card?

Such cards are best for those individuals who have a limited budget. People who want to strictly adhere to their budget limits and do not want to fall into the endless spiral of debt will find a prepaid card most useful. As is clear from the name itself, these cards come preloaded with a certain sum of money. The users of such cards are only able to spend that amount for their expenses. This way they can easily keep track of their finances and use only that much money that is required by them, without overspending.

However, if someone wants to use more money than what is allowed by their prepaid card’s limit, then some of these cards do come with the option of adding more money. This way the cardholders are able to use the card even when the funds in it are depleted. 

There are also some specific prepaid cards that can be used only once. As soon as you have exhausted the amount in your card, such cards will no longer be useful.

These cards are not linked to your personal bank account. As a result of this, they do not carry the threat of over drafting. Beyond that, these cards are universally accepted anywhere where any major credit card will be accepted. Additionally, they can also be useful for the below mentioned purposes:

  • For paying bills
  • For online shopping
  • For everyday purchases be it grocery shopping or buying gas
  • For withdrawing money from ATMs

Apart from this, just like a debit card or  a credit card, a prepaid card also comes with an expiration date so make the most of it while you can!

What is a Debit Card?

Easily counted as one of the most convenient ways to spend money, a debit card uses that money which you have in your bank account. As opposed to credit cards that have the looming threat of damaging your credit Score as well as prepaid cards that require one to constantly remember to deposit a sum of money before it can be used, a debit card is efficient in that it is linked with your bank account. This enables you to conveniently withdraw money directly from your bank account whenever you shop or spend on anything. It also helps in keeping your expenditure in check as you can not spend more than you earn.

When one uses a debit card to make purchases, there is a hold placed upon the amount of the particular purchase. Meanwhile as this hold is in process, the merchant sends the details of the transaction to his or her own bank, the amount of the purchase is then transferred from your bank account into the merchant’s bank account. Generally, this entire process is completed within a day or a few days.

Understandably using debit cards is quite convenient but it is also important to keep track of any of the outstanding transactions. This will help in avoiding the oversight of overdrawing your bank account. If you do this, you will have to pay an enormous overdraft fees as a penalty. In some extreme cases, for instance, if you overdraft your account for a whole day with more than just one single merchant, you might even be slapped with several overdraft fees.

Another benefit of having debit cards is that you can utilise them at all places that accept a credit card. These cards come with a PIN which is used to withdraw money from the ATM or while making online and offline transactions. These PINs offer an extra layer of safety against any fraud or theft attempts. Apart from this, because debit cards are linked to the user’s bank account, it makes it easier to keep track of any fraudulent or suspicious activity and take remedial actions without wasting any time as time is of the essence in such situations.

What is a Credit Card?

These cards prove to be extremely useful if someone is trying to build their credit history. The transactions made from a credit card enable their users to borrow some money from their LOC or line of credit. They are convenient to use for simple transactions made anywhere in the world where the merchant accepts a MasterCard, Visa, American Express, Discover or any other card. These cards prove to be a powerful instrument as it allows its user to get access to a loan instantly. This loan can be repaid in a repayment period chosen by them, making credit cards even more appealing to an average spender. However, it is only smart to always pay off any credit card balance one incurs each month so as to prevent their debt from piling on. This can also result in credit problems and thus the cardholder should wisely choose how and when they wish to repay their existing balances.

Being unable to do so will result in cardholders to pay heavy interest rates. If the balances on your credit card are not timely repaid, they will be carried over to the next month. This will also result in the interest charge getting added to the overall balance on your card.

The advantages of using credit cards do not stop there. Apart from giving card users access to more money as well as help them build their credit history, credit cards also provide multiple rewards. These reward offers include cashback, discount coupons, exclusive offers from top brands and many more. A cashback offer allows cardholders to get cashback points that can be accumulated over time by making specific purchases like gas or groceries or others. Over a period of time these points can be redeemed for cashback in your account or they can be interchanged for certain financial rewards like gift cards.

Let us look at a comparison between these three card types to understand their differences better:

LIMIT Can be reloaded Depends on the amount of money available in your bank account Depends on the credit limit of the cardholder
PENALTIES AND FEES No interest charges Incurs no interest charges but might come with overdraft fees Interest charges are applicable on unpaid balance and there are penalties for late payments
PAYMENTS Deducts the corresponding amount of prepaid credits from the prepaid loan/ balance The amount is withdrawn directly from your checking/ savings account Enables one to borrow money that has to be paid back at the end of the billing cycle one chose
BALANCE MAINTAINENCE  No maintaining balance is required There is a need to maintain balance No need to maintain balance
ATM WITHDRAWL Most of the prepaid cards can not be used to withdraw money at the ATM Can withdraw money from the savings or checking account at the ATM Allows one to withdraw some portion of the credit limit but at a cost
Prepaid Card Vs Credit Card - Which One is Best for You

Let us make the choice easier for you by offering the ideal situations in which these cards can be used:

If you are shopping from any major retailer Yes Yes Yes
If you are booking flight tickets, hotel or any other accommodation No No Yes
If you are making a tiny purchase from some independent retailer Yes Yes No
If you plan to make payments in installments No No Yes
If you want to build a credit score for any future bank transactions  No No Yes
If you wish to limit your spendings Yes Yes No
If you want to keep a record of your spendings No Yes Yes
If you are seeking rebates and rewards No No Yes
If you are looking for security of getting your money back in case your card is lost  No No Yes
If you are aware that you are not disciplined in paying your bills on time Yes Yes No

In a Nutshell

In spite of the many differences that set apart these three cards from each other, they have certain similarities. They are widely accepted and used due to the convenience they offer their users. They are a great alternative to carrying heavy wallets and dealing with the safety and security of your earnings. Choose any one of these after evaluating their pros and cons carefully.

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