Prepaid credit cards explained

Sarah Coles
hands entering credit card...
hands entering credit card...

You could be forgiven for wondering why anyone would want a prepaid credit card. Surely if you wanted something that could be used to pay for things in the same way as a credit card, you'd just get one and save yourself the bother of loading it with cash. However, there are those who can't get credit, or who need help managing their money, and for them a prepaid card can make perfect sense.

The cards themselves are straightforward: you load cash onto the card, and then use it anywhere that you would usually use a credit card. You don't have to worry about whether the cards will be accepted, because a number of the prepaid cards are operated by Visa or Mastercard, so they are taken anywhere that those brands are.

Who does it suit?
The fact that you cannot spend more than you have available makes the card ideal for people who have trouble managing money. The card gives you the convenience of a credit card without the risk that you build up an unmanageable debt. It can also be used to help you budget more effectively. If you load it with all the disposable cash you have each month, when it's gone, it's gone. It could be useful way to stop you dipping into your overdraft.

It is also a sensible option for teenagers, who can receive credit on their card as their allowance. It means parents can put some money onto the card and some into the bank - so they don't worry that their children use their debit card to empty their account on a monthly basis. It also saves them from carrying large amounts of cash with them - which could make them a target for thieves. Some of the cards designed specifically for teenagers have apps that let parents see what the money is being spent on too.

Prepaid cards can also work well for people who have a poor or non-existent credit record. In instances where you would struggle to get a traditional credit card, these provide a useful alternative. There's even one which can help build your credit (although it's not a cheap card). The cash plus credit builder lets you tick a 'credit builder' option during application, which structures your monthly fee as a loan with monthly repayments. This will mean your credit file has evidence of you paying off a loan.

It can also be a very handy way to spend money overseas, and there are specific foreign currency cards which are designed especially for this. Some of them even let you spend money and withdraw from ATMs without paying a fee. The exchange rate tends to be better than on cash, and it means you don't have to carry large amounts of money on your holiday and risk losing the lot.

Prepaid cards may also be a sensible solution if you want to spend money online and you are worried about the security of your card. You can load it with just the money you want to spend on your specific purchase, then even if a criminal gets hold of the details it won't be any use to them.

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Understanding How Prepaid Cards Work
Understanding How Prepaid Cards Work

Less protection
However, you should be aware that your card is not covered by section 75 of the Consumer Credit Act 1974, so if your retailer goes bust or refuses to refund you for faulty or damaged goods, you don't have the same right to a refund from your card provider as you would with a credit card (if you spend at least £100).

They are also not covered by the Financial Services Compensation Scheme, so if your card provider goes under you stand to lose everything you have loaded onto the card.
The cost
But the real downside is the cost. If you plan to get one of these cards you will need to weigh up the benefits against the fees the card providers charge.

These come in a variety of guises. There's sometimes an application fee when you first get the card - which can be up to £10. And once you have held the card for three years, you will usually have to pay a renewal fee of up to £7.

There may also be a monthly fee of up to £5. This can really add up, and there are some cards which don't charge a monthly fee, so it's worth checking out the options available

The other one to watch for is the transaction fee. Every time you spend money in a shop it can cost you about 50p, and whenever you withdraw cash at a cashpoint you'll pay a set charge or a percentage of the amount you withdraw. These fees vary widely, and there are some which don't charge for transactions in shops, so it's worth shopping around carefully for a card with the charges that suit you best.

In many cases you will be choosing between a monthly fee or a transaction fee, so the best option will depend on how often you use the card. However, there are some which charge neither, so make sure you check the whole market.

Even if you get the card for something specific and don't intend to use it regularly, you may be hit with a fee. Many of the cards have inactivity charges - so it's worth finding out what your card charges if you don't use it regularly.

Finally, when you have finished using the card, you may still have money on it that you want to cash in. Typically this redemption fee is around £10.

When you weigh up the charges, for many people, as long as you have a reasonable credit rating and the discipline to pay your card off in full every month, you may be better off with a credit card.

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