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What is a Prepaid Card?

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 actually credit cards. There is no revolving line of credit. This type of card works just 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 or in person.

You can top-up when funds run out, but you can’t go into any sort of overdraft or spend more than you have pre-loaded onto the card. So why should you choose a prepaid card and what are the advantages and disadvantages of doing so?

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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 really useful. 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.

These cards also come in handy for under 18s who aren’t old enough to have a credit card. Parents or guardians can load the card with funds before allowing the young person to spend on it. With absolutely no risk of accumulating debt, this is a safe and secure way for your child to spend.

Exceptions to the rule

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. However, there are some reasons that prepaid cards can prove useful when travelling.

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 when going on holiday, 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. Preload a card with your budget for a small trip, which can keep spending in check
  • Some prepaid cards do offer perks for use such as cashback

If you have bad credit, 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.

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.

What is a prepaid card image

Prepaid card disadvantages

Other fees for use you may be charged include:

  • Transaction fees on spending
  • Loading fees
  • ATM withdrawal 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.

Should I get a prepaid card?

Whilst a prepaid card does not allow you any options in terms of borrowing, it does give you the opportunity to spend without risk of accumulating debt. This is ideal for those travelling on a budget or for young people who are just learning about how spending works.

Not sure a prepaid card is for you? Why not read our guides which credit card is best for me or find alternatives to credit cards to find out more.

Updated on 28th May 2019