How do travel prepaid cards work?

Going on holiday is expensive, but it can be even more so if you’re stung with unexpected fees and charges by your card company or get a poor exchange rate when getting cash at the airport.

A prepaid card can avoid these problems. It is a simple way to manage your spending abroad and can help you keep costs under control. But getting it right means picking the right prepaid card option with the best financial provider. 

Here’s what you need to know.

How do prepaid cards work?

You use them to spend money in other countries and currencies instead of cash, travellers’ cheques or your usual credit or debit card.

You can load money onto the prepaid card using your regular debit card, a bank transfer or adding cash in person. When you take it abroad, you can:

• Withdraw money from cash machines

• Spend on the card in outlets like shops and restaurants

You can use it in the same way as a credit or debit card, but you can only spend the money you have already added to your balance. This is because prepaid cards do not let you borrow money.

Here is how to use a prepaid card and manage your account.

What are the advantages?

Normal prepaid cards charge higher fees if you use them abroad. But travel prepaid cards are usually cheaper, and some don’t charge at all for foreign transactions or cash withdrawals, making them more affordable than most credit or debit cards.

You do not need to work out exactly how much you will spend before you travel, as you can add more funds to the card if you run out.

They can also be more secure than taking cash because if it was lost or stolen:

• The thief would need to know your PIN to use it 

• You could cancel it as soon as you realised it was missing

• You could get the balance on it transferred to a replacement card

Here are the advantages and disadvantages of prepaid cards

What currencies can you spend?

There are three types of prepaid cards designed for travel:

• Sterling cards show your balance in pounds and let you spend in several different currencies, and the money is only converted to the correct currency as you spend or withdraw cash. This type of card can be used in several countries.

• Single currency cards show your balance in the foreign currency they offer – for example, euros or dollars. When you add money to the card, it is automatically converted to that currency.

• Multi-currency cards offer several different currencies and let you hold a separate balance for each of them. For example, you could have £200, $300, €100 and so on – across all the currencies the card offers.

Make sure the card you choose allows you to spend in the currencies you need for your planned holidays before you apply.

What exchange rate do you get?

Your card provider sets the exchange rate. They base their rates on the spot rates offered by the company that processes its transactions, Visa or MasterCard.

The best rates on a prepaid card are these spot rates with no extra fees, which some providers offer. Unfortunately, most add their own fee, which may be around 1.5%. When choosing a card, look for the one that gives you the best deal with the lowest fees or, even better no fees, when exchanging your money.

Cards that keep your balance in pounds and let you spend in multiple currencies convert sums to the new currency each time you spend on the card or withdraw cash, meaning the exchange rate you get will vary throughout your trip.

Prepaid cards that keep your balance in the currency you want to spend, like euros or dollars, use whatever the exchange rate is when you load money onto the card.

For example, with a prepaid card that lets you spend in dollars:

• You add £500

• The exchange rate at that moment is 1.35 dollars to the pound

• Your card converts it to $675

Even if the exchange rate were to go up or down before you spend the money on your card, it would not affect your balance: you would still have $675 to spend.

What is peer to peer exchange?

How to find a travel prepaid card

Look for the right currencies

You can find prepaid cards that you can use abroad here. Just make sure you apply for a prepaid card if it lets you spend in the currencies and countries you need.

Check the cost

Prepaid cards come with several fees, including:

• The cost of buying the card

• An annual or monthly fee for using the card

• Fees for adding money to the card

• Cash withdrawal charges

• Transaction fees when you make a purchase 

Fees for loading money onto the card, withdrawing cash or spending abroad can be charged at a flat rate or as a percentage of the amount you are adding or spending.

Work out how much you expect to spend abroad before you travel, including:

• At cash machines. Decide if this is likely to be in one go or several smaller withdrawals.

• On your card in shops, restaurants and other businesses.

You can then check how much each card charges for those transactions and choose the cheapest one.

Consider the alternatives

You can also spend abroad using cash and credit or debit cards. Here is how much they each cost and how to decide which to use.