Should you get a prepaid card?

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Prepaid cards come with several pros and cons, but they could be the best way of spending for you. Here is how to work out whether you should get a prepaid card.

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Prepaid cards make it easy to manage your budget without risk of overspending, but there’s an array of charges you need to bear in mind before you apply.

What are the advantages of prepaid credit cards?

No credit checks when you apply

Prepaid cards only allow you to spend money you have loaded onto your card - you aren’t borrowing money and cannot go overdrawn. 

This means providers do not need to check your credit record when you apply, so you can still get a prepaid card even if you have bad credit or have previously been rejected for credit cards or bank accounts.

Could improve your credit rating

As prepaid cards are not credit accounts they won’t show up on your credit record. As such they have neither a positive or a negative effect on your credit score. However, some prepaid cards could rebuild your credit record if they have a credit building feature included.

There is usually a monthly fee for this feature, but paying this each month counts as a loan repayment and shows up on your credit record. After several months, your credit record should improve as long as you keep making payments.

Widely accepted

The transactions on a prepaid card are processed by Visa or MasterCard, which means they are accepted by most businesses that take card payments.

You can use them in the UK or abroad:

  • In person

  • Online

  • By phone

  • By mail order

Are prepaid cards safe to use?

Useful for budgeting

Prepaid cards can help you plan your spending because you can only use money you have already loaded onto the card. This means you can avoid:

  • Overspending: you can choose to only load the card with the money you can afford to spend for a period of time, for example until payday or while you are on holiday. Once you have spent it all, you cannot use the card until you top it up again 

  • Getting into debt: there is no overdraft facility or any other way of borrowing money with a prepaid card.

You can also plan your spending by keeping track of your balance and the transactions you have made using your card's online account or app.

You can spend abroad

You can use prepaid cards abroad, but some charge higher fees for transactions outside the UK.

However, travel prepaid cards are designed to cost less to use overseas , and some come without fees for spending or withdrawing cash while you are away.

How to use a prepaid card abroad

Additional cards for your family

You can get more than one prepaid card linked to the same account. This means you could have one card to use yourself and additional cards for your partner, children or even friends.

This can also be useful for businesses with two or more employees that need to make purchases.

Compare prepaid cards for businesses

What are the disadvantages?

They can be expensive

Prepaid cards can be more expensive than spending on a debit or credit card because they come with a range of fees. These will vary between providers but may include: 

  • Application fees to open the account

  • Monthly or annual fees for using the card

  • Fees for paying money onto the card

  • Fees for paying with the card

  • Cash withdrawal fees

  • Charges for not using the card

  • A charge for closing your account

However, they do not let you borrow money, so they do not come with the interest and fees that credit cards or overdrafts can charge.

Here is more information about the fees that come with prepaid cards

They do not work for some transactions

Most prepaid cards do not allow you to make pre-authorised transactions. This is when you pay for anything where the final cost is not yet known, for example:

  • Paying for petrol at the pump

  • Hiring a car

  • Checking into a hotel 

  • Setting up a tab in a pub

 This is because your balance might not be enough to cover the final bill amount, and prepaid cards will not let you borrow money to cover the rest.

Some prepaid cards can be used for these transactions, but your money may be ring fenced. This means a deposit amount is frozen on your card for as long as 30 days to cover the transaction’s actual cost.

For example, if you use a prepaid card to check into a hotel, they may ring fence £200 of your balance to cover the final bill. Even if it only came to £80, you would not be able to spend the remaining £120 until the deposit is unfrozen, which could take up to 30 days.

Less purchase protection than credit cards

Most prepaid cards do not offer Section 75 protection, which is a feature that comes with credit cards to refund you if something goes wrong with a purchase.

However, you could instead use the Chargeback scheme to get your money back if what you buy is lost, faulty or incorrect and you are unable to get the money back from the retailer.

Less protection for the money than your bank account?

The money in your current and savings accounts is protected by the Financial Services Compensation Scheme (FSCS). If your bank or building society went out of business, you could get back up to £85,000 of your money held with them.

Prepaid cards are not protected by the FSCS, but if your card provider went bust you may still get the money on your balance back.

This is because your money is looked after by a bank or building society, not by the card provider.

However, if that bank or building society went out of business, you could lose all of the money on your prepaid card. This is why it may be helpful not to load more money onto your prepaid card than you need.

How to choose a prepaid card

The best card for your needs depends on how you want to use it. 

Before making your choice consider:

  • How often you will top it up 

  • The number of cash withdrawals you will make

  • How frequently you will use it for transactions out and about

  • Whether you will use it overseas

For example, if you will mostly use it to withdraw money from cash machines, a card with low ATM fees could work out cheapest. However, if you are more likely to use it paying for goods and services your priority should be charges for transactions.

You can pick the cheapest by using our  prepaid card comparison.

What types can you get?

If you need your card for a specific purpose, you could get one designed for your needs. For example you can get cards

  • For overseas use: Some cards come with cheaper fees for spending abroad or let you hold a balance in other currencies. Here is how to use a prepaid card abroad.

  • For your business: These cards can be held in the name of your business, and you can usually get more than one if you need to issue them to several employees. They will only be able to spend money you have added to the card's balance.

  • For your family or other people to use: You can get joint prepaid cards if you want one for yourself and additional cards for your family or friends.

Should you get a prepaid Visa or MasterCard?

How to apply

Once you have found the best prepaid card for you, you can usually apply online . Here is how to get a prepaid card.

Whether you need a prepaid card for spending overseas, easy budgeting or due to bad credit, we can find the right option for you by comparing some of the best deals around.

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