What is a prepaid card?

How is a prepaid card different to a credit or debit card?

While credit, debit, and prepaid cards have some similarities, there some key differences:

• debit cards allow you to spend the equivalent of the funds you have in your account. When the funds run out, your card might be declined, unless you have an arranged overdraft
• credit cards allow you to spend up to a certain limit. You’ll repay this debt monthly (including interest, if applicable). If you go over your limit, your card may be declined, and you may have to pay a fee. Your credit history can be impacted if you don’t keep up with repayments, as per the terms and conditions
• prepaid cards let you spend only the amount of money you put on them. Once it runs out, it will be declined, and you won’t be able to use it until you top it up again

The pros

Mainly, the biggest advantage of a prepaid card is that you can’t run up any debt by using it. If you have a debit card, you could run into your overdraft, but with a prepaid card, there is no credit facility attached. You simply spend what you have on the card and there’s no interest charge to use it.

Other pros include:

• it's safer than carrying cash - if you lose the card you should be able to contact your provider and get the card frozen
• they’re widely accepted by most retailers via chip and PIN
• you can normally use them abroad with lower cash withdrawal fees compared to credit card and debit cards
• there are no credit checks involved when you apply, so you don’t need a good credit score to be accepted
• it can help with budgeting, as you can only spend what you have loaded onto the card.

The cons

While a prepaid card can have lots of benefits, there are some disadvantages as well.

The main disadvantage of a prepaid card is that it’s not as flexible as a debit card or credit card. Meaning, when you’ve spent the amount you topped up, it’s gone. However, this could be considered an advantage if you’re hoping to improve your budgeting.

Other disadvantages include:

• it can be a bit of an administrative task to top it back up
• there can be several fees involved depending on the card you take out
• you’re not protected by the Section 75 Act. The Section 75 Act means purchases made between £100 and £30,000 on a credit card are protected by the card provider
• you may not be able to use it for certain purchases, such as a security deposit like when you hire a car.

What are the fees involved with a prepaid card?

Prepaid cards can often come with several fees. For example:

• setting up fee
• monthly usage fee
• fees for ATM withdrawal
• inactivity fee
• transaction fee
• fee for redeeming money off the card, i.e., if you want to take back the money you’ve loaded onto it, instead of spending it.

It usually costs no more than £10 to set up a prepaid card. Other types of fees widely vary depending on the card provider. It’s best to check the terms and conditions of your card fully before you apply.

Credit builder prepaid cards

Some prepaid cards are designed to build your credit score. They work in the same way as normal prepaid cards where you top your card up with cash.

However, if you choose a credit builder prepaid card, the lender will essentially provide you with a years' worth of fees that you’ll repay. When you start making your payments, your credit score should improve. Like other prepaid cards, you won’t need a credit check to be accepted.

Can I get a prepaid card if I already have a credit card?

You can still take out a prepaid card if you already have a credit card. If you prefer to keep your credit card for emergencies but don’t want to carry cash around with you all the time, you could use a prepaid card instead.