What are prepaid cards?
Prepaid cards are cards that you load with cash. You can then use them for everyday spending in shops or online. Basically anywhere cards are accepted.
They typically do not offer any credit facility. Which means you can only spend what you have loaded onto the card. This makes prepaid cards a useful financial tool if you are looking to budget.
As prepaid card providers do not require applicants to undergo a credit check, prepaid cards are also a good option if you currently have bad credit.
How to use a prepaid card
Using a prepaid card is relatively simple.
The first step is to load it with funds. It will depend on the card, but with most you can do this via an online payment, through your mobile phone, with a bank transfer or by paying cash at a bank, Post Office or PayPoint store.
Once you have loaded cash onto the card, you can start to use it as you would a debit or credit card. Prepaid cards are usually either Visa or MasterCard, so are widely accepted.
The key difference when it comes to prepaid cards compared with credit or debit cards is that you cannot spend more than the balance on the card, as there is no overdraft or credit facility. That means that with a prepaid card you don’t have to worry about building up a large debt and being charged interest.
How we picked the winners
There are several factors that you need to take into account when choosing a prepaid card. Here are the key elements that we considered when making our shortlist.
- Fees – Prepaid cards carry a range of fees, so we looked at card issuance fees, monthly/annual fees, fees to load funds, and fees for withdrawals and transactions
- Loading the card – A prepaid card is much less useful if it’s complicated or difficult to top up the card. So we preferred cards that make it easy for you to add money.
- Features and benefits – Many prepaid cards have benefits that make them particularly useful for certain people. For instance, some have credit rebuilder programmes that can help people build or rebuild their credit rating. Others offer parents the ability to provide payment cards to their children without the worries associated with a credit card.
How do prepaid cards work?
Using a prepaid card is relatively simple.
First, you need to load it with funds. It depends on the card, but with most you can put money on via an online payment, with a bank transfer or by paying cash at a bank, Post Office or PayPoint store.
Once you have money on your card, you can start using the card as you would a credit or debit card. Prepaid cards are usually either Visa or Mastercard, so are widely accepted.
The key difference with a prepaid card compared with a credit or debit card is that you cannot spend more than the balance on the card, as there is no overdraft or credit facility. That means that with a prepaid card you don’t have to worry about building up a large debt and being charged interest.
What are the different types of prepaid cards?
There are different varieties of prepaid card. It is worth considering what you plan to use the card for and therefore which type would best suit your needs.
- Pounds sterling prepaid card – These are standard prepaid cards. They are cards that you can load with pounds sterling and then use for transactions and withdrawals in the UK. Some pounds sterling prepaid cards have credit rebuilder programmes as a feature, but not all do. So if that’s a feature that’s important to you, make sure that the prepaid card you’re considering explicitly states that it includes a credit rebuilder programme.
- Cards for teenagers – Most prepaid cards require you to be above 18 year of age to qualify, but some are available to those under 18. It can often be useful for kids to have access to a payment card that’s accepted online and at shops and restaurants, but bog-standard prepaid cards don’t provide the oversight and protections that many parents would like to have. Prepaid cards designed for under-18s can be a good fit here.
- Currency cards – These cards have cheaper fees than other prepaid cards for using the card abroad. They typically come in the form of euro cards or dollar cards.
- Cards for business – These are cards that are held in your business’s name and are used for company spending.
What are the advantages of a prepaid card?
There are several advantages of a prepaid card, especially if you are someone who fails to budget or if you have had financial difficulties and have a poor credit score.
One of the biggest advantages of prepaid cards is that providers do not require a credit check. Therefore, you would be able to take one out even if you have had a county court judgement (CCJ) in the past and be able to use it as you would a credit or debit card. Some cards also offer a credit rebuilder programme, which allows you to improve your credit score and therefore maybe access a wider range of financial products in the future.
Another positive aspect of a prepaid card is that it is a useful tool for budgeting. No borrowing facility is available, which means that you cannot be tempted to overspend, and therefore you can avoid high overdraft charges or interest rates on other cards.
Certain prepaid cards are aimed at allowing parents to give their children a payment card, while putting certain controls in place. For instance, these cards can allow parents to track their kids’ spending, determine where the card can (and can’t!) be used, add spending limits and even block the card entirely. And of course, providing a child with a prepaid card ensures that she or he doesn’t overspend and incur debt.
Finally, prepaid cards are widely accepted. Being under the Visa or Mastercard banner means that they can be used for contactless or chip and PIN transactions, online payments or phone or mail order transactions. Some cards will even allow you to set up direct debits or standing orders for your account.
What’s the catch?
The main thing to be aware of with a prepaid card is the fees. The fees come in many different forms, so it is worth looking at how you will use the card and therefore where the majority of your costs are likely to lie.
Card issuance fee – This is an administrative fee that some cards carry for taking them out.
Monthly/annual fee – This is an ongoing cost, which you will either pay every month or every year.
Transaction and ATM fees – These are fees associated with using the card. Some cards charge a fee for each transaction (either a set amount or a percentage of the purchase) or for any ATM withdrawals made.
Inactivity fees – Some cards charge you a fee if your account becomes dormant for a period of time, for example if you have not used it for three months.
Additional card fees – It depends on which card you select, as some include complimentary additional cards whereas others will charge you a fee for anyone you add to the account.
Cancellation/redemption fees – You may be charged a fee if you want to receive the money remaining on the card when you close your account.
There are other drawbacks to a card like this. For example, you will not be able to use a prepaid for certain transactions, such as pre-paying for petrol at the pump or a hotel bill. This is because, for these transactions, you may not know the full amount when you hand your card over, so the bill may end up being more than the funds available on your card.
There are also limits in place specifying how much money you can load or spend on a card, although this will be down to the individual product.
Finally, there is less protection with a prepaid card. Prepaid cards are not covered under Section 75 of the Consumer Credit Act, so the legislation will not apply if you have an issue with a purchase on a prepaid card and are struggling to get a refund.
What to look at when choosing a prepaid card
Prepaid cards come with a range of different combinations of fees and features, so it is best to sit down and think about what you plan to use the card for and therefore which card would cost you the least. Here are some of the key features you should look at when comparing prepaid cards.
Fees – We’ve already talked a lot about the fees here, but it bears repeating. The more fees you pay, the less money you keep in your pocket. Certain features or benefits may only be available on cards that carry additional fees, so in those cases it can make sense to pay additional fees. But the best approach is to determine exactly which features are important to you and find the card that offers those features at the lowest cost possible. That way you’re not paying for features that aren’t important or useful to you.
Loading options – A prepaid card can be more or less useful depending on how easy it is to load new money onto it. Different cards have different options for topping up, so it’s good to look at a few cards to determine which method will be best for you. And the ‘best’ method is typically the easiest and lowest cost (ideally free!) method.
Overseas usage fees – This especially applies if you are thinking of a currency card. Look at whether the card carries a foreign transaction fee or whether a fee is attached to making ATM withdrawals while abroad.
Who is eligible for a prepaid card?
Most prepaid cards require you to be aged 18 or over in order to apply, although some are targeted at teenagers and therefore have a lower age limit.
You will need to be a UK resident and able to prove your identity. As mentioned previously, prepaid card providers do not look at your credit history, but they do require you not to have been previously convicted of fraud.
Is a prepaid card right for you?
A prepaid card can be useful in the right circumstances. If you are looking to budget a bit better, a prepaid card can allow you to do that as it does not allow you to overspend. You can load the card with the balance that you need to see you through the month and stick to it.
Prepaid cards are also useful if you have a poor credit history and are struggling to get approved for a other types of cards, as they do not conduct a credit check. However, do bear in mind that unless the card comes with a credit rebuilder programme, your credit score will not improve by using a prepaid card. If that is something you are looking at finding a card for, then it is worth considering a credit rebuilder card instead.
A prepaid card is also useful if you have teenagers. There are prepaid cards available to those under 18, or some cards allow you to add an under-18 as an additional cardmember on the account. The teenager could then use the card for their own purposes, but you would still be able to view their account activity online.
If you are planning to travel, a prepaid card may also be a good fit for you. It avoids you having to carry cash in the local currency, and prepaid currency cards often offer competitive exchange rates.
The key thing to consider before taking out a prepaid card is what it will cost you. Consider how you are going to use it and whether what you plan to use it for can be done instead with a debit card in order to avoid prepaid card fees.
