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 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.
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'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.
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 both look and can be used like normal credit and debit cards which makes them a convenient means of spending both on and offline. What's more, many are backed by major payment service providers such as Visa and MasterCard and so can be used anywhere these payment methods are accepted both in the UK and overseas.
No credit checks -There are no credit checks carried out when you apply for a prepaid card and 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 - Prepaid cards aren't linked to a bank account or credit facility so there is no risk that you will spend more money than you have available. This means that it's impossible to go overdrawn or run up large bills unlike more traditional spending cards. Once your card has run out of credit, you simply won't be able to make any more transactions until you top up.
Budgeting - Because you can only spend the money you have loaded onto your prepaid card they are particularly useful if you need to stick to a budget. Most providers offer online account management so you can keep an eye on your outstanding balance and purchase history too which makes keeping track of your finances simple.
Overseas spending - Many prepaid cards allow you to make purchases and withdrawals both in the UK and overseas so they can be a convenient and more secure alternative to carrying foreign currency when you travel abroad. There are a number of specially designed prepaid travel cards available and these tend to offer very competitive rates for spending and withdrawing cash overseas.
Sharing money - Most providers will be able to issue multiple cards for a single prepaid account and this makes for a convenient way to share money with friends and family without opening a joint bank account. For example, prepaid cards can be used by couples and flatmates to jointly budget and pay bills, by parents to help teach their children the value of money and monitor their spending, or to securely send money to those travelling overseas.
What are the disadvantages?
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.
Charges that you might face include a set up fee, monthly or annual services charges, top up fees, withdrawal fees, inactivity charges and a cancellation charge. For this reason, choosing a card that is going to provide you with value for money is a must.
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.
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.
Where can I use a prepaid card?
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.
How do I load cash on to a prepaid card?
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.
Are prepaid cards secure?
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.
Can they improve your credit rating?
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.