What is a Prepaid Card?
If you need something more convenient than cash without the temptation of credit and the risk of plastic connected to your bank account, selecting a prepaid credit card could be your path to enlightenment.
This 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. But why should you choose a prepaid ‘credit’ card and what are the advantages and disadvantages of doing so?
If answers to these questions you do seek, read on as we clear the mist...
How prepaid cards work
First things first, these cards aren’t actually 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. For those flying off on travels near or far flung, there are some other reasons prepaid cards can prove a useful item to pack.
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 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.
These work by loaning you the monthly fee for the card, which you pay on time every month so that you get some nice positive feedback on your credit report. Most prepaid cards charge a monthly or annual fee for holding them, though these cost a little bit more on the specialist credit builder cards.
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.
Not sure a prepaid credit card is for you? See our guides to understanding credit cards, which credit card is best for me or find alternatives to credit cards here.