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The advantages and disadvantages of Prepaid Cards

The advantages and disadvantages of Prepaid Cards

Category: Credit cards
Updated: 01/12/2017

Recent years have seen a quiet revolution in the way we choose to pay for things, as more and more transactions happen by card instead of cash.

Debit and credit cards have grown in popularity because they offer a quicker and easier, not to mention safer, alternative to carrying a wad of cash in your wallet.

But the problem is that the convenience and speed of paying by card can often lead to people overspending, or getting themselves into a dangerous maelstrom of debt before they realise it. So, how can you combine the convenience of card spending without the worry of going over the top?

Pre-paid cards: convenient and controllable spending power

Pre-paid cards combine the convenience of a credit or debit card with the ability to allow you to set your spending limit according to your budget.

They're available to everyone, regardless of credit rating, income, or whether or not you hold a UK bank account.

How do pre-paid cards work?

Essentially, pre-paid cards look the same as any other card; they have a magnetic strip, chip, long number on the front and a familiar logo such as MasterCard or Maestro.

Appearances can be deceiving though. Although looking the same as a credit or debit card (you even get your own PIN as you would for another card), a pre-paid card does not let you spend from your current account, nor does it let you pay for goods by using a pre-agreed credit facility.

Instead, you load money onto the card (how much is up to you, although there's usually a minimum and maximum amount you can pre-load), and then you use the card to spend money in the same way you'd spend using a credit or debit card.

Once the money on the card runs out, you can't spend any more until you have uploaded some more funds.

The advantages and disadvantages of prepaid cards

Pre-paid cards, like any financial product, have their own unique advantages and disadvantages:

Advantages Disadvantages

No credit check
A pre-paid card does not offer a credit facility – so they don't credit check you. However, you will still need to provide acceptable ID and be a UK resident.

You can't get into debt
As there's no credit facility you can't get into debt.

You're in control
You set your spending limit, not the card provider. All you need to do is top-up your card when you need to via text, phone, a Paypoint, the Post Office or by BACS transfer from your bank account.

Pre-paid cards work in the same way as credit and debit cards, so you can also use them abroad. Prepaid travel cards are specifically geared for use outside of the UK. Cards are issued in specific currencies, so check that the card you opt for covers the currency you need.

Pre-paid cards for teenagers and students
Some providers take applications from customers in their early teens (usually from the age of 13). This can give your child a great sense of independence while teaching them the rudiments of managing their finances without the risk of getting into debt. Alternatively, some allow you to add up to four additional cards for friends and family. This is perfect for loading cash onto as an alternative to vouchers for a Christmas present.

Act as a basic type of bank account
Pre-paid accounts are an alternative to a traditional bank account and are a new way to manage your money. With certain pre-paid account cards for everyday use, there is no need for a bank account as they enable your wages to be paid onto your card and allow you to top it up via BACS or with cash at a PayPoint or Post Office branch.

Improve your credit rating
Some pre-paid cards allow you to improve your credit rating by charging a monthly fee, which is treated like a tiny loan. This is referred to as a Credit Booster. At the end of a nominated period (usually 12 months) this shows up as an honoured credit agreement on your credit file. Of course, you have to pay the monthly fee (normally around £5 per month) for the privilege of using this service.

A lot of prepaid cards offer cashback benefits for purchases you make on the card, particularly online.

Fees, fees and more fees
Always a catch, isn't there?

The big catch with pre-paid cards, if you're not careful, is the fees.

There may be fees for:

  • Setting up a pre-paid card.
  • Loading money onto the card (try to only put money onto your card by bank transfer, as this method tends not to attract any fees).
  • Monthly administration (although some providers offer a pay-as-you-go option).
  • Making purchases on the card
  • Taking cash out at a cash point.
  • Inactivity. If you leave funds on your card, there is a possibility that they will be wiped off after a certain period of time. Some cards may also charge a fee if you don't use it regularly.
  • Redeeming funds. If you've got leftover cash on the card, and you want to extract it to avoid the inactivity fee, you may still get stung with a redemption fee.

If you are using your prepaid card abroad, these fees will probably increase. Be sure to compare prepaid cards that charge the fewest and lowest fees and read the small print before committing.

A prepaid card is not a credit card
Credit cards benefit from purchase protection by law under section 75 of the Consumer Credit Act, but prepaid cards don't have to offer this. That said, there are a few prepaid cards that offer free purchase protection, although this may be less than that offered by a credit card.

A pre-paid card is not a debit card
Because a pre-paid card is not linked to a bank account, any money loaded onto it doesn't fall under the protection of the Financial Services Compensation Scheme. And of course, once your money is loaded onto a pre-paid card, it isn't earning you interest as it could do in a bank account.

There are certain transactions you can't use your pre-paid card for; mainly transactions where your card would normally need to be pre-authorised before the full cost of your purchase is known. An example of this is when a hotel asks you for your card number as security when you check in, so if you forget to pay your room bill at the end of your stay, they can charge your card.

Also, if you have £99 on the card and you want to buy an item worth £100, you would need to load more money onto the card before you can buy, which could be quite frustrating after waiting in a long queue!

What next?

Compare pre-paid cards for everyday use

Compare pre-paid travel money cards

Compare basic bank accounts

More cards guides

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.