What is a Prepaid Card?
If you need something more convenient than cash without the temptation of credit and the risk of overspending, selecting a prepaid card could be the answer.
Although these are sometimes referred to as prepaid credit cards, they are not a credit card. There is no revolving line of credit. This type of card works a little like a store gift card. You load on your money in Sterling, Euros or Dollars and present it to pay wherever you would usually use your credit card or debit card, online, over the phone and in person. You can top-up when funds run out, but you can’t go into any sort of overdraft or use more pounds than are placed on the card. So why should you choose a prepaid card and what are the advantages and disadvantages of doing so?
How do prepaid cards work?
Prepaid cards work in a similar way to top up cards for your mobile phone. These cards aren’t credit cards as they don’t have a borrowing facility. However, not being linked to a credit account can be a really useful feature for some folks. If you prefer to avoid the lure of spending money you don’t have or you’ve got a poor credit history and find it difficult to access borrowing, a prepaid card can give you some of the convenience of a credit card without the risk.
With money loaded onto the card of your choice – in one of the three big currencies – you’re free to spend as you usually would. Because these products are backed by the same big companies Mastercard and Visa, as credit and debit cards are, you can use this plastic most places you can use the more familiar cards.
There are some exceptions though. For example, if you’re travelling and hoping to reserve a room for the night in your next port of call, a prepaid card doesn’t have a function that allows funds to be held then released, so it can’t be used for traditional hotel bookings. A specialist travel credit card may suit you better. There are some reasons that prepaid cards can prove useful when travelling however.
Prepaid card advantages
- Prepaid cards aren’t attached to your bank account so reduce the risk of fraud. If lost or stolen, you can block the card and have a new one issued without losing the money
- You can load your prepaid card in advance to take advantage of good exchange rates, which is fixed at the time of loading
- Prepaid cards are safer and more convenient to carry than cash and some can be set up by those as young as 13, so if kids are heading off on school trips they can be a good option
- You can reload money onto your card usually over the phone or online or preload a card with your budget for a small trip, which can keep yours or the kids’ spending in check
- Some prepaid cards do offer perks for use such as cashback
If your credit history is not the best, you’ll be pleased to know that prepaid cards don’t require a credit check, though there are some special credit builder prepaid cards that may prove useful in improving your credit score.
Other fees for use you may be charged include:
- Transaction fees on spending
- Loading fees
- Withdrawal from ATM fees
However, it’s worth noting that if you’ve got a prepaid card that’s already in Euros, you’re not going to be charged the exchange fee you would be charged on a debit or credit card as you spend.
Unfortunately, one of the negatives is that prepaid cards aren’t subject to the same consumer protection as their counterparts. As they are not a form of credit they don’t come with protection under Section 75 of the Consumer Credit Act, though you may find your card is voluntarily signed up to the Chargeback scheme if it is a Visa card. And, as your money is stored outside of your bank account it is outside of the Financial Services Compensation Scheme too.
The most common use for prepaid cards is as a travel companion, however, for those struggling in the aftermath of insolvency or bankruptcy, a prepaid card can offer a solution if you’re unable to open a regular bank account. Some cards allow you to have your wages paid directly onto your card and for bills to come out too, though you’ll need to pay fees for the service.