What is a prepaid card?

What’s a prepaid card?

Just like credit cards and debit cards, prepaid cards allow you to withdraw cash and pay for purchases in-store and online. The difference is that you need to load money onto a prepaid card before you can use it.

You can only spend or withdraw the amount you’ve loaded on to your card. So, they can be a good way to stick to a budget and to avoid overspending.

Prepaid cards are also a useful option for people who are unable to get a bank account or credit card because of a poor credit history. That’s because you don’t need to complete a credit check to get a prepaid card.

These types of cards are generally accepted anywhere you see the Mastercard or Visa symbol.

How do prepaid cards work?

Before you can use your card, you need to pre-load it with money. There are several ways to do this:

• Transfer money to your card from a bank account.
• Use your credit or debit card to top up your card online or via an app.
• Pay cash onto your card at a Post Office or at a shop with the PayPoint service.
• Instruct your employer to get your salary paid direct to your prepaid card account.

To withdraw money from a cash machine, you simply enter your PIN as you would with a normal debit card.

Similarly, you can use the card to pay for bills, goods and services in-store or online, just as you would a regular credit or debit card. 

Prepaid cards tend to charge a lot of fees though, for everything from withdrawing cash to adding more money to your card. You may even have to pay a monthly administration fee. So, it's important to tot up how much you'd be expected to pay for using it.

Advantages of prepaid cards

A prepaid card can be a great way to manage your money when used correctly.

Stick to a budget

They’re a convenient way to set limits and keep track of your spending.

Steer clear of debt

Unlike a current account or credit card where you could end up borrowing more than you can comfortably afford - prepaid cards allow you to spend only what you have in your account. If there’s not enough on the card when you try to make a purchase, the transaction will be declined. That means no interest or overdraft fees to pay.

If there’s not enough on the card when you try to make a purchase, the transaction will be declined. That means no interest or overdraft fees to pay.

No credit checks required

Prepaid cards are a good alternative for people who can’t get credit or debit cards because they have a poor credit history. They’re also an option for people who have no credit history - such as those who have just moved to the UK, or for expats returning home.

They’re also an option for people who have no credit history,  - such as those who have just moved to the UK, or expats returning home.

Travel

Useful for going abroad when you don’t want to carry large amounts of cash with you. They also offer some security because, if you lose your card, you can cancel it.

Limit teen spending

You can allow your children and teens access to a limited amount of money on a prepaid card. This helps to avoid overspending making them a useful tool to help young people manage their spending and to learn about budgeting.

An alternative to a bank account

Some prepaid cards allow you to pay bills by setting up direct debits and regular payments as you would with a regular bank account.

Disadvantages of prepaid cards

Fees

Prepaid cards can come with lots of fees - and these vary from card to card - so be sure to read the terms and conditions carefully before you choose. 

Charges can include a one-off set-up fee when you obtain the card, monthly administration fees, loading fees (added each time you pre-load your card), transaction fees whenever you make a purchase or make ATM cash withdrawals, plus ‘dormancy’ or ‘inactivity’ fees if you don’t use your card for a long period of time.

Less protection

Under section 75 of the Consumer Credit Act, all credit card purchases on items over £100 (and under £30,000) are protected. So, if you’ve unsuccessfully attempted to get a refund for faulty goods or services from a retailer or company (or if they go bust), you can make a claim against your credit card provider to get your money back. 

So, if you’ve unsuccessfully attempted to get a refund for faulty goods or services from a retailer or company (or if they go bust), you can make a claim against your credit card provider to get your money back. 

Prepaid cards don’t offer this same level of protection. But, if a seller refuses to refund you in a dispute, you can ask your bank to try to get your money back from them by using the ‘chargeback’ process. It isn’t a legal right, but your bank should try to help you.

Not accepted everywhere

Places that require a security deposit - such as car hire firms or hotel bookings - may not accept prepaid cards.

How to pick the right card for you

To find the best deal for you and your circumstances, think carefully about how you will be using the card. Then compare charges for the transactions you mostly want to do.

Things to consider may be how often you need to withdraw cash at the ATM and whether you prefer to load the card with small amounts regularly or with a larger lump sum less often.

Also, although it’s not set in stone, cards with a monthly fee usually tend to charge smaller fees for transactions and offer some for free.

Types of prepaid debit cards

General purpose

Used like a credit or debit card for everyday spending and budgeting, a prepaid card allows you to withdraw cash and pay for purchases in-store and online up to the amount you’ve loaded onto the card.

Under 18s

This type of prepaid card can to give teenagers some financial freedom, while limiting the amount they spend. You can preload cards with their pocket money, for everyday use, or give them a card to use on days out or holidays, or for emergencies.

Prepaid travel card

Sometimes called a prepaid currency card or travel money card, these are cards you pre-load with money, then take away with you on holiday to spend. You can withdraw cash at ATMs or use the cards in shops and restaurants, just as you would a credit or debit card.

You can either pre-load cards with your choice of currency at a set exchange rate - or with sterling, which will be converted into the currency of the country you’re spending in, at the exchange rate on the day.

Credit-builder prepaid cards

Most prepaid cards won’t improve your credit score because you’re not borrowing and repaying money when you use one.

But special credit-builder prepaid cards can help improve your credit rating. They work in just the same way as other prepaid cards, but they give you the chance to add on a ‘credit-building’ option.

They do this by lending you the equivalent of one year of the card’s monthly fees. When you pay your monthly fee, you’re effectively making a repayment on a loan, so these payments will be reported to credit reference agencies. Paying on time and in full shows you’re a reliable borrower and will help boost your credit score.

It's vital that you stick to the terms and conditions of the card though.

Is a prepaid card right for me?

With no hard credit checks required, prepaid cards are easy to obtain. This makes them a useful option if you have a poor credit history and can’t get accepted for a bank account or credit card.

They’re also a useful money-management tool and can help you stick to a budget and avoid falling into debt.

They do come with fees, though, which can mount up depending on how you use the card.

In most cases, if you're able to get accepted for a credit card and can be confident you’ll limit your spending to what you can afford, plus make repayments on time (and preferably in full) every month, this might be a better option.