What are prepaid cards?
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 are not 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.
How do they work?
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 have used up all the credit loaded on your card you won't be able to make any further purchases until you next top up.
What are the advantages?
Prepaid cards are becoming an increasingly popular means of spending and for good reason. Some of the benefits they provide are:
Convenience: Prepaid cards can be used like credit and debit cards both on and offline. They use payment service providers like Visa and MasterCard, so can be used anywhere these payment methods are accepted in the UK and overseas.
No credit checks when you apply: This makes them particularly suitable for individuals who have a poor credit history or find it difficult to get a regular debit or credit card elsewhere.
No credit facility: They are not linked to a bank account or credit facility so there is no risk you will spend more money than you have available. It is impossible to go overdrawn or run up large bills as you cannot make transactions until you top up.
Budgeting: You can only spend money you have loaded onto your card, which can help you stick to a budget. Online account management means you can track your balance and purchase history.
Overseas spending: Prepaid cards can be a convenient and more secure alternative to carrying foreign currency when you travel abroad. Some offfer competitive rates for spending and withdrawing cash overseas.
Sharing money: Getting multiple cards for a single prepaid account lets you share money with friends and family without a joint bank account. Couples and flatmates can jointly pay bills, or you could securely send money to family travelling overseas.
What are the disadvantages?
Fees and charges
Charges can make these cards an expensive option for spending. These include:
A set up fee
Monthly or annual services charges
Top up fees
A cancellation charge
If you take out cash you may also have to pay fees set by the ATM provider, and they may also limit how much you can withdraw.
Many providers do not allow you to make pre-approved transactions such as those used by:
Pay-at-the-pump petrol stations
Car hire firms
Companies providing goods or services that requires an initial authorisation for funds to be made before the full value of the transaction is known
Check the terms and conditions of any card you are interested in before you apply to make sure it can be used in the way you need it to.
Some prepaid cards ring fence money for up to 30 days after a transaction. This works in a similar way to a hotel taking a deposit to cover any potential costs.
For example, using your prepaid card at a pay-at-pump petrol station machine can lead to your funds being restricted while the transaction is processed.
Where can you use a prepaid card?
Most cards can be used anywhere you would usually spend with a credit or debit card:
Over the telephone
By mail order
How do you load cash on to a prepaid card?
This will differ depending on who supplies your card. Most can be loaded with cash either directly from your bank account using an online transfer or in person at a bank, Post Office or PayPoint retailer.
Are prepaid cards secure?
Even if a fraudster gets hold of your card details they can can only withdraw the cash you have credited on to your card and nothing more.
Most prepaid cards will be chip and pin enabled. This means that anyone using your card to make a purchase or withdraw cash will need to enter a secure code before the transaction is authorised.
If you discover your card is missing, 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 even compensate you for any lost credit.
Can they improve your credit rating?
Most prepaid cards are not linked to your credit report so do not affect your credit record.
If you want to improve your credit history, there are a few prepaid cards that can be used to do this. Compare the likely cost and availability with a credit building credit card to see which offers you the best credit building potential for the lowest cost.