A prepaid card offers all the convenience of paying on plastic without the risk of racking up debt.
How do prepaid cards work?
A prepaid card works a bit like a pay-as-you-go mobile phone. You choose how much money you wish to load on to it and then use the card anywhere you would a debit card — in shops, restaurants or online. You also can withdraw cash at ATMs.
Loading money onto a prepaid card is simple: either log in to your account and pay by debit or credit card, or pay in cash at a post office, some banks or shops that have a PayPoint service.
Why and when to get a prepaid card
Prepaid cards can be great for helping you stick to a budget. You can’t spend more than your prepaid card’s available balance, and they are not linked to your bank account, so you can’t overdraw like you can with a debit card.
The downside of prepaid cards is they can come with more fees than credit or debit cards, everything from card-opening fees and monthly usage fees to ATM withdrawal fees and even inactivity fees. Every card will be different, but do your research and choose the right card for your circumstances, and the benefits could outweigh the costs.
For instance, because no debt is involved, prepaid card eligibility isn’t linked to your credit score. That makes the application process very simple, and those with a poor credit history who may struggle to get a credit card or bank account are often able to get a prepaid card.
Some prepaid cards can even help you improve your credit score. Credit builder prepaid cards work by lending you a year’s worth of the monthly fees interest free and getting you to repay the money each month. Pay what you owe each month on time and in full and your card provider will share this information with the credit reference agencies in the first month. Keep it up and within three months of using your card your credit rating should start to improve. Fees on this type of prepaid card can be high, however, so only use them if you really need to.
Other types of prepaid cards can come in handy when travelling abroad. Prepaid travel cards can be preloaded before your trip, and while you’re away you can spend or withdraw cash as you would normally using a debit card. This helps you cut down the amount of cash you need to take with you. And as you can usually lock in the exchange rate when you load the card, you don’t have to worry about it fluctuating during your time away.
Prepaid credit cards can even make a good alternative to dolling out pocket money cash to your kids and help teach them to manage their own money.
Are prepaid cards safe?
In terms of safety, if your card gets lost or stolen, your card provider can cancel it and protect your balance as long as you report it quickly. And like credit and debit cards, prepaid cards are printed with a CVC number (the three-number ‘credit verification code’ you find at the end of the signature strip) which protects you from fraud should thieves get hold of your card details without the actual card.
Money loaded on cards is not covered by section 75, which offers protection on credit card purchases over £1,00. However, prepaid cards issued by Visa and MasterCard are included in their chargeback schemes that offer consumer protection should anything go wrong — whether that’s a faulty good or a product failing to turn up.
How to choose a prepaid card
You can view all types of prepaid card deals and fees easily online.
It’s quick and easy to apply for a prepaid card, and there’s usually no need for a credit check. The card provider usually will just verify your identity and check that you are aged 18 or over before you’re accepted.
It’s important to know the potential advantages and disadvantages of credit cards before applying for one. Even though credit cards can be useful, there are some risks to be aware of too.