A guide to prepaid cards

What is a prepaid card?

Prepaid cards work in a similar way to pay-as-you-go mobile phones. You load the cash you want on to your prepaid card, and you’re then free to spend it in most places that accept debit or credit cards. So, how does it differ from these?

Most debit cards allow you to spend the equivalent of the funds you have in your account. It is your money you’re spending and, once it runs out, you may find your card is declined. A credit card, on the other hand, lets you borrow money to spend up to a limit agreed with your lender. If you go over this limit your card may be declined, or you may be charged a fee for doing so. You also have to keep up with your repayments or your credit rating could be affected.

A prepaid card lets you spend only the money you have loaded on to it. Once this money has gone, you will not be able to use your card until you have topped it up. So, how is that better than cash?

Practical advantages

The main advantage a prepaid card has over cash is that it’s more convenient to carry around – and less of a security risk. If your prepaid card is lost or stolen, you should be able to contact your provider and get the card frozen before anyone is able to spend your money. This obviously doesn’t apply to cash – once it’s gone, it’s gone for good! A prepaid card is also easier to carry around than cash. And because they’re usually accepted anywhere that accepts payments for transactions on plastic, you don’t have to worry about withdrawing all the cash you need before going shopping.

The benefits of prepaid

If you regularly travel abroad, you may find a foreign currency prepaid card is a useful tool to have in your wallet. A prepaid card works in a similar way to a traveller’s cheque, which helps to reduce the risk of you falling victim to fraud.

When you use your credit or debit card abroad, you’ll find there’s often a fee involved when you withdraw cash or make a purchase. This is typically an admin charge on top of the exchange rate. However, prepaid cards tend to charge you less – or nothing at all – for spending or taking out money. There may be a one-off fee to set up the card though.

Prepaid cards can also a useful option if your credit rating means that you’re unable to take out a credit card, or if bankruptcy means you have struggled to open a bank account but still want access to a debit card, as there are usually no credit checks involved. With a prepaid card, you can enjoy many of the practical advantages of shopping on plastic, like not having to carry wads of cash around, and your credit rating shouldn’t be affected. This means they’re also a good choice for kids and teenagers, who are too young for a debit or credit card but who want to get used to budgeting and spending with plastic. You could even load their pocket money on to one!

What if I have a credit or debit card?

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

Prepaid cards can also help with budgeting, which is great news if money’s a little tight. Load your card with the cash you think you’ll need for the week or month, and try to avoid using your credit card or taking out more money. By sticking within the limit of the money you have added to your prepaid card, you may find it’s easier to keep track of your budgeting and avoid spending too much before your next payday arrives.

Are there any disadvantages?

The main disadvantage of a prepaid card compared to other cards is that it’s just not as flexible. You can spend what you put on there – but that’s it. However, as we mentioned above, if you’re on a budget you might actually see this as an advantage.

Something you might see as a disadvantage is that there’s no financial protection, like there would be had you used a credit card. Credit card purchases are protected under Section 75 of the Consumer Credit Act, which means that if the item you’ve bought (providing it’s over £100) is lost, stolen, broken or not as described, or if the vendor has gone out of business, your lender is liable to provide you with a refund. This is not the case with a prepaid card, if something goes wrong with your item, you must rely on the vendor alone to refund you.

Another possible disadvantage is that your prepaid card is unlikely to be as widely accepted as a debit or credit card. This can make spending difficult and may mean you have to plan more before you go shopping, pay for petrol or visit a restaurant.

How much does it cost?

There may be a fee for setting up your card, but this is unlikely to be much. However, some providers charge a fee for every month you use the card, and if you stop using it, your provider may charge you a fee for this too.

Some prepaid cards are designed to help you build up your credit score; which may make them attractive if you have no real credit history to speak of, or if your credit rating has been negatively impacted by your borrowing activity in the past. This type of prepaid card typically comes with a monthly fee, and paying this is what helps improve your credit rating.

You may also be charged for transactions like withdrawing cash using your prepaid card. And if you decide you want to redeem some of the funds you loaded on to your card, for example, after returning from a holiday, you may have to pay a fee for this too. Be certain to include all of these potential charges when working out whether applying for a prepaid card is the right move for you.