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Gift card vs. prepaid debit card: Which makes a better gift?

Prepaid debit cards can be a useful budgeting tool, but traditional gift cards are easier to use.聽

By Spencer Tierney , NerdWallet

Cash is an easy gift option, but what form it should take is another question.

Putting bills into an envelope may work, but it鈥檚 not ideal: There鈥檚 no way to recover cash if it gets lost or stolen. Plus, it鈥檚 easy to forget cash was a gift once it鈥檚聽tucked into a wallet.

Storing cash on plastic cards is better, provided聽you choose wisely between gift cards and prepaid debit cards. Here鈥檚 what to know.

Gift cards vs. prepaid debit cards

Both are prepaid cards, meaning you put money on the card in advance for spending at physical and online stores. They also offer protections against loss if you register them in your name. They work differently, though. Gift cards are only spending cards, so they don鈥檛 allow cash withdrawals, and most聽aren鈥檛 reloadable.

Prepaid debit cards, on the other hand, let you make purchases but also withdraw cash at ATMs, banks or certain retail stores, as well as use web features such as bill pay. They鈥檙e also reloadable.

Because of their flexibility, prepaid debit cards can serve as budgeting tools or even as replacements for checking accounts.聽They鈥檙e聽popular聽for curbing overspending, which teens or young adults may struggle with.

Winner: Gift cards

Prepaid debit cards have more uses than gift cards, but they鈥檙e not ideal as gifts. The biggest reason is cost. Many have monthly fees that add up to between $12 and $120 per year, and there may be other fees as well.

Gift cards are the better choice,聽but they鈥檙e not all equally good deals.

鈥淕eneric gift cards like those from Visa or American Express allow recipients to buy at any store that accepts that card network, but they may come with activation fees that the gift giver will have to pay,鈥 says Courtney Jespersen, retail expert at NerdWallet.

If you buy a Visa or MasterCard gift card from a bank, there might not be an activation fee, but there may be fees for card replacement and for not using funds within a year.

鈥淪hoppers can get around most, if not all, fees by buying a specific gift card directly from a retailer or restaurant instead,鈥 Jespersen says.

鈥淭he bottom line is that traditional [retail] gift cards are easier to use and a better value,鈥 says Lauren Saunders, associate director of the National Consumer Law Center in Washington, D.C.

Understand the terms and any fees on a gift card before you buy it so that your holiday gift brings joy with no fees attached.

Spencer Tierney is a staff writer at NerdWallet, a personal finance website. Email:聽spencer@nerdwallet.com. Twitter:聽@SpencerNerd.

This article first appeared in NerdWallet.聽