Prepaid cards have been around in various forms such as gift cards and store cards for a number of years. Recently, however, the prepaid card market has seen a significant expansion with a huge number of new products now available in the UK.
Commonly marketed as a safer alternative to carrying cash around and with less risks attached than taking out a credit card, prepaid cards have become an increasingly popular product due to their flexibility and variety of practical uses.
Know Your Money's comprehensive guide will provide you with all you need to know about prepaid cards including information on how they work and how to use one as well as tips for finding the right card for you and advice for getting the most out of it.
What is a prepaid card?
Prepaid cards appear to be just like standard credit and debit cards and they operate in a very similar way. The main difference, however, is that to use them for transactions or withdrawing money the cardholder must first load, or top-up, the prepaid card with funds. Since they are not linked to a bank account each card comes with a prepaid account which can be loaded with money in a variety of ways. Money loaded into a prepaid account receives no interest, as you may expect with a standard bank account. Once loaded the card can then be used for purchases in-store and online or for withdrawing cash both in the UK and abroad. Prepaid card providers usually charge for loading the card with money and/or for transactions. Some also charge a monthly fee as well as other administration fees.
Why would I want a prepaid card?
Prepaid cards offer customers versatility and convenience and there are a number of practical features that make them particularly appealing. Here's a rundown of the main selling points:
- Security: Prepaid cards are more secure than cash especially for young people or others who are at an increased risk from theft. Since a PIN number is required to use the card and funds, in most cases, can be frozen by a simple phone call to customer services, so even if they are stolen or lost the cardholder's money is relatively safe. NOTE: Unlike credit cards, prepaid cards are not covered by the Consumer Credit Act (CCA), which gives consumers more rights to seek compensation should something go wrong with a transaction.
- No risk: One of the most appealing aspects of prepaid cards is that there is no risk of debt. By the nature of the card you can only spend what you have and there is no lending or credit involved. What's more, there are no charges for late payments or any of the other penalties involved with credit cards (there can be hidden charges for admin and cancellations though). Therefore, they are suitable for people with debt problems who do not meet credit card providers' lending criteria.
- Availability: And since there is little risk involved they are widely available to most people. Prepaid card providers' criteria are minimal age, income, bank accounts, credit rating etc are of no significance in most cases. Furthermore, since there are no requirements for cardholders to have a bank account they can act as an alternative for those who do not have one thus employers can pay wages or parents can pay pocket money directly onto a prepaid card instead of into a bank account.
- Travel: The security provided by a prepaid card also makes them ideal for travelling since tourists are often targeted by thieves. Not only that, but some prepaid card are specifically designed for use abroad many offer low transaction fees on overseas purchases while others allow cards to be filled with foreign currencies.
- Age: Another reason that you may want a prepaid card is that many are available to under-18s. Again, security is a key factor as younger people are often at more risk from theft, but also it allows parents to load money onto a card instead of giving them cash which can often be more convenient.
- International transfers: Prepaid cards are also becoming an increasingly popular method of economically transferring money abroad. By sending a card to a family member or someone abroad they can be topped up in the UK and the money spent overseas as usual (overseas transaction charges differ from card to card so make sure that these fees are low if you intend to make use of this feature). They are a much cheaper than traditional money transfer methods.
- Budget control: Most prepaid cards come with online management facilities. This makes them an ideal way to control your finances if you are on a tight budget. Unlike paying for everything with cash it provides you with clear rundown of your outgoing expenses as well as allowing you to limit how much you load onto the card so that you (or any other cardholders) can efficiently avoid overspending.
How do prepaid cards work?
Getting a Prepaid Card: Prepaid cards are generally purchased online though some are available to buy in high street shops. Most cards cost between £5-£10 and when applying customers are usually required to present some proof of identity and/or address. Most prepaid cards have a 100% acceptance rate - since you don't need a bank account, credit rating or proof of earning etc that you would require with a credit card or other forms of credit. Once purchased your personal card is posted out to you.
Topping up: Cardholders must load their prepaid account with funds before their card can be used for purchases. This can be done in a number of ways. Depending on the card and provider they may be topped up by any of these methods:
- Online using debit/credit card
- Via your bank (transfer from account at a branch, online or over the phone)
- Have your wages paid directly onto your prepaid card
- At a Post Office branch
- At a PayPoint location (shop or garage)
- At various retail outlets
Some of these methods will allow funds to be loaded immediately while others may take a few days. The maximum amount of money that a card can hold differs from product to product and there may also be limits on how much can be loaded on to a card in any 24-hour period and by a particular top-up method.
Buying things: Prepaid cards are used in exactly the same way as a debit or credit card for purchases in the UK and abroad and since all cards on market are either VISA or MasterCard they are almost universally accepted. As with standard debit/credit card transactions, customers purchasing in-store enter their card into a standard card machine and must subsequently enter their individual PIN code. The money is then taken from the card account along with any transaction fees that are incurred. Likewise, online transactions and ATM withdrawal (both in the UK and abroad) are also carried out in the same way as with a credit or debit card but are subject to different charges depending on the card and provider.
Choosing a prepaid card
The best approach when choosing a prepaid card is to carefully consider what you will be using it for and then to check the relevant usage fees of each card. If, for example, you intend to use your card predominantly for online shopping you should check the transaction charges; however, if you only plan to use it on holiday, so that you don't have to worry about foreign currencies, then you should look at overseas transaction and withdrawal charges.
Most cards fall into two categories: those with no monthly fee but slightly higher transaction/top up charges and those with a monthly fee (or sometimes annual) but lower top-up fees. Some cards allow you to choose between the two by offering a 'pay monthly' and a 'pay as you go' account types, therefore you should consider which would be the most economical option for your likely card expenditure - e.g. if you think you will use the card regularly then the monthly fee type may prove cheaper; while the pay as you go type would probably represent a better choice for infrequent spenders.
Tip: Once you have found a card that you think would be suited to your usage, the final step is to check the provider's terms and conditions carefully - some prepaid cards have further administration costs and other miscellaneous fees like cancellation/cash out charges that can greatly affect the running costs of the card. All of this information will be displayed somewhere on the provider's website.
To compare prepaid cards from the UK's leading providers click here.
Author: KYM Editor
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