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Prepaid cards look just like regular credit and debit cards, with a card number, magnetic strip and chip. They can also be used to make purchases and withdraw cash just as you would with a regular credit or debit card too.
However, there is one major difference; as they aren't linked to a bank account or credit facility there is absolutely no risk that you can go overdrawn or run up any debt as you can only spend the balance you have available.
You top up your prepaid card with cash just as you would a pay-as-you-go mobile phone or prepaid gift card. Then, when you come to make a purchase or withdraw cash from an ATM the value of your transaction is automatically deducted from your card balance. Once you've used up all the credit loaded on your card you won't be able to make any further purchases until you next top up.
Prepaid cards are becoming an increasingly popular means of spending and for good reason. Some of the benefits they provide are:
The main disadvantage of using a prepaid card rather than a debit or credit card is that most providers levy a number of charges that can make these cards a more expensive option for spending. For this reason, choosing a card that is going to provide you with value for money is a must.
For more information on the different costs associated with spending on a prepaid card read our guide What Do Prepaid Cards Cost to Run?
Additionally, many prepaid card providers place restrictions on the way you can spend on your card. In particular, many do not allow you to make pre-approved transactions such as those used by pay-at-the-pump petrol stations, car hire firms and during any other purchase for goods or services that requires an initial authorisation for funds to be made before the full value of the transaction is known. As such it's important to familiarise yourself with the terms and conditions of any card you're interested in before you apply so as to make sure that it can be used to make payment in the way you need it to.
Most cards can be used to make purchases online, over the telephone, by mail order and in shops, basically anywhere you would usually spend with a credit or debit card. You can also use them to withdraw cash at ATMs.
This will differ depending on which provider supplies your card. However, most prepaid cards can be loaded with cash either directly from your back account using an online transfer or in person at a bank, Post Office or PayPoint retailer.
One of the distinct benefits of prepaid cards is that they are not linked to a bank account or credit facility. This means that should a fraudster get hold of your card details there is a finite amount of damage they can do as they can only withdraw the cash you have credited on to your card and nothing more.
Additionally, most prepaid cards will be chip and pin enabled. This means that, just as with credit and debit cards, anyone using your card to make a purchase or withdraw cash will need to enter a secure code before the transaction is authorised, again making them a secure way to spend.
If you discover your card is missing you will simply need to contact your card provider and they will place a block on the card so that it can't be used by anyone else. Some providers will also compensate you for any lost credit, although this isn't standard practice for all providers.
Most prepaid cards aren't in any way linked to your credit report so unfortunately it is not possible to improve your credit rating with careful spending and good financial practice, although this is of course a good idea anyway!
If you're looking to improve your credit rating there are a few prepaid cards that can be used to do this. You should compare the likely cost and availability with a credit building credit card to see which offers you the best credit building potential for the least cost.
Read our guide How to Choose the Best Prepaid Card to find out how to choose the best prepaid card for your circumstances.
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