Why use a prepaid card?

Credit cardsYorkshire Bank has launched a new prepaid card. How does it compare? And what are the plus points of using a prepaid card?

Yorkshire Bank and Clydesdale Bank – part of the same banking group – now offer prepaid cards in pounds, euros and the US dollar.

Prepaid cards are often touted as:
  • a widely accepted alternative for purchases and withdrawals when struggling to get a debit card or bank account,
  • a way to prevent spending more than you've got,
  • a convenient way to spend overseas,
  • an alternative to a credit card,
  • a place to have your salary paid to electronically if you're struggling to get a bank account,
  • a safer way for adults and children to pay for things without carrying cash around and
  • a way to teach children about money.
Let's look at each of these benefits to see what legs they've got, and to see if the new Yorkshire and Clydesdale Bank prepaid card has come up with anything new:

If you're struggling to get a debit card or bank account
Prepaid cards are available to almost everyone. However, each card carries fees. You will face some or all of the following:
  • Set-up or processing fee
  • Annual fee
  • Dormancy fee
  • Loading fee (for putting money onto the card)
  • Purchase fee
  • Withdrawal fee
  • Foreign exchange fee
  • Online gambling fee
Fee for paying your wages directly onto your card (not all cards allow your wage to be paid on to the card)

Cancellation or redemption fee
The Yorkshire and Clydesdale Bank card is no exception, charging most of these fees. Although you might be able to avoid many of them with some cards by reading the invariably complicated small print very carefully, you'll still always pay charges for your card, one way or another.

In contrast, some banks offer free basic bank accounts with a debit card included, even for people with awful credit records. The two I know are Barclays Bank's Cash Card Account and Co-operative Bank's Cashminder Account. Neither of these bank accounts charge fees for running your account or using your card.

If you're worried you'll spend more than you've got
Those basic bank accounts are also a better alternative for ensuring you don't go into the red. Neither allows you to have an overdraft, and yet they still win over prepaid cards on operating fees and simplicity.

The Barclays account also offers you free weekly statements by SMS, and sends you a warning when you're low on funds. Some prepaid cards offer similar text services.

The basic Barclays and Co-operative bank accounts will hit you with penalties if you don't have enough money in your account to pay a direct debit or standing order. Barclays charges £8 per unpaid item (maximum £8 per day, so you might want to set all your automated payments to go out on the same day). Co-op charges £15 per item, with one free slip allowed per year.

Most prepaid cards don't allow you to set up direct debits to take payments from the account anyway. I have found just one that does, the cashplus card. This one, however, might tempt you with an overdraft facility, and comes with some of the usual charges.

Also, Barclays explains that it might choose to permanently cancel your direct debits if you can't afford to pay them, which should help keep you under control.

Foreign money
Yorkshire Bank and Clydesdale Bank offer prepaid cards in euros and US dollars as a convenient way to shop overseas. Other prepaid cards remain sterling cards, but sell themselves as offering attractive exchange rates.

There might be additional safety with a prepaid card compared to using cash, especially if you're not in a group so that you can spread the money around.

However, in terms of cost, I've looked into quite a few prepaid cards over the years and I'm yet to identify one that's worth its fees and charges while also offering an exchange rate competitive with your best foreign exchange alternatives.

Your best alternatives include a small handful of debit and credit cards or to compare prices and order your foreign exchange online for pick-up at a local, independent high-street bureau.

Prepaid cards as alternatives to credit card
I don't see how prepaid cards can be sold as alternatives to credit cards. Most prepaid cards don't function in any way like a credit card, and the Yorkshire and Clydesdale Bank prepaid card is no different.

Prepaid cards don't offer the same legal benefits as using a credit card. They also don't normally allow you to borrow and generally cannot be used to improve your credit history.

One exception is the cashplus card already mentioned, which, if you fail to get credit elsewhere, is a pretty much guaranteed way to be offered a tiny loan – that you're not allowed to spend – with the single purpose of building a 12-month credit history.

It's safer with prepaid cards
The Yorkshire Bank and Clydesdale Bank cards could be safer than carrying cash around the UK too, although the same could be said of the debit cards from Barclays and the Co-op.

Prepaid cards can be a safer way for children to carry money, although you could simply limit the amount of cash they're allowed to carry, which is clearly the safest way to avoid any unnecessary prepaid card fees!

Teaching children with prepaid cards
In short, I don't see how children can't learn just as much – if not more – by seeing the cash itself, rather than using prepaid cards.

I am not aware of any prepaid cards currently available to new customers, including the new one from Yorkshire and Clydesdale banks, that I would recommend above the alternatives. I'll let you know if that changes.

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