A prepaid card can be a great option if you’re building or rebuilding credit, have kids and want to give them a payment card, or are travelling abroad.
Here’s everything you need to know before you choose a prepaid card.
What are prepaid cards?
Prepaid cards are cards that you load with cash. You can then use them for everyday spending in shops or online, basically anywhere cards are accepted.
They typically do not offer any credit facility, which means you can only spend what you have loaded onto the card. This makes prepaid cards a useful financial tool if you are looking to budget.
As prepaid card providers in the UK do not require applicants to undergo a credit check, prepaid cards are also a good option if you currently have bad credit.
How do prepaid cards work?
Prepaid cards work similarly to gift cards in that you can only spend the funds you have on the card. However, with a prepaid card, you reload funds onto the card and spend it the same way you would a debit or credit card.
The key difference when it comes to prepaid cards compared with credit or debit cards is that you cannot spend more than the balance on the card, as there is no overdraft or credit facility. That means that with a prepaid card you don’t have to worry about building up a large debt and being charged interest.
What are the different types of prepaid cards?
There are different varieties of prepaid card. It is worth considering what you plan to use the card for and therefore which type would best suit your needs.
Pounds sterling prepaid card
These are standard prepaid cards. They are cards that you can load with pounds sterling and then use for transactions and withdrawals in the UK. Some pounds sterling prepaid cards have credit rebuilder programmes as a feature, but not all do. So if that’s a feature that’s important to you, make sure that the prepaid card you’re considering explicitly states that it includes a credit rebuilder programme.
Prepaid cards for teenagers
Most prepaid cards require you to be above 18 year of age to qualify, but some are available to those under 18. It can often be useful for kids to have access to a payment card that’s accepted online and at shops and restaurants, but bog-standard prepaid cards don’t provide the oversight and protections that many parents would like to have. Prepaid cards designed for under-18s can be a good fit here.
Prepaid currency cards
These foreign currency cards have cheaper fees than other prepaid cards when traveling abroad. They typically come in the form of euro cards or dollar cards.
Prepaid cards for business
These are cards that are held in your business’s name and are used for company spending.
Prepaid card fees
The main thing to be aware of with a prepaid card is the fees. The fees come in many different forms, so it is worth looking at how you will use the card and therefore where the majority of your costs are likely to lie.
- Card issuance fee – This is an administrative fee that some cards carry for taking them out.
- Monthly/annual fee – This is an ongoing cost, which you will either pay every month or every year.
- Transaction and ATM fees – These are fees associated with using the card. Some cards charge a fee for each transaction (either a set amount or a percentage of the purchase) or for any cash withdrawals from an ATM.
- Inactivity fees – Some cards charge you a fee if your account becomes dormant for a period of time, for example if you have not used it for three months.
- Additional card fees – It depends on which card you select, as some include complimentary additional cards whereas others will charge you a fee for anyone you add to the account.
- Cancellation/redemption fees – You may be charged a fee if you want to receive the money remaining on the card when you close your account.
Advantages of prepaid cards
There are several advantages of a prepaid card, especially if you are someone who fails to budget or if you have had financial difficulties and have a poor credit score.
- No credit checks – Providers do not require a credit check. Therefore, you would be able to take one out even if you have had a county court judgement (CCJ) in the past and be able to use it as you would a credit or debit card. Some cards also offer a credit rebuilder programme, which allows you to improve your credit score and therefore maybe access a wider range of financial products in the future.
- Budgeting – Prepaid cards are a useful tool for budgeting. No borrowing facility is available, which means that you cannot be tempted to overspend, and therefore you can avoid high overdraft charges or interest rates on other cards.
- Parental Control – Certain prepaid cards are aimed at allowing parents to give their children a payment card, while putting certain controls in place. For instance, these cards can allow parents to track their kids’ spending, determine where the card can (and can’t!) be used, add spending limits and even block the card entirely. And of course, providing a child with a prepaid card ensures that she or he doesn’t overspend and incur debt.
- Wide Acceptance – Prepaid cards are widely accepted. Being under the Visa or Mastercard banner means that they can be used for contactless or chip and PIN transactions, online payments or phone or mail order transactions. Some cards will even allow you to set up direct debits or standing orders for your account.
Disadvantages of prepaid cards
Despite a good amount of advantages with prepaid cards, there are a few things to watch out for as well.
- Fees – As we’ve broken down above, there are several types of fees on prepaid cards to be aware of.
- Limits on where you can use them – You will not be able to use a prepaid for certain transactions, such as pre-paying for petrol at the pump or a hotel bill. This is because, for these transactions, you may not know the full amount when you hand your card over, so the bill may end up being more than the funds available on your card.
- Limits on how much you can spend –There are also limits in place specifying how much money you can load or spend on a card, although this will be down to the individual product.
- No section 75 protection – There is less protection with a prepaid card. Prepaid cards are not covered under Section 75 of the Consumer Credit Act, so the legislation will not apply if you have an issue with a purchase on a prepaid card and are struggling to get a refund.
How to use a prepaid card
Using a prepaid card is relatively simple.
1. Load it with funds.
It will depend on the card, but with most you can do this via an online payment, through your mobile phone, with a bank transfer or by paying cash at a bank, Post Office or PayPoint store.
2. Use the card as you would a debit or credit card.
Once you have loaded cash onto the card, you can start to use it as you would a debit or creditcard. Prepaid cards are usually either Visa or MasterCard, so are widely accepted.
3. Top up the funds when needed.
You can top up your card the same way you did the first time you loaded your card with funds. However, be aware of any fees associated with loading more funds to your card. Even if it seems small, it can add up over time if you’re reloading the funds often.
What is the best prepaid card in the UK?
Unfortunately, we can’t say one card is the ‘best’ prepaid card in the UK. It really comes down to what you individually need in a card.
Prepaid cards come with a range of different combinations of fees and features, so it is best to sit down and think about what you plan to use the card for and therefore which card would cost you the least.
Here are some of the key features you should look at when comparing prepaid cards.
Fees
We’ve already talked a lot about the fees here, but it bears repeating. The more fees you pay, the less money you keep in your pocket. Certain features or benefits may only be available on cards that carry additional fees, so in those cases it can make sense to pay additional fees. But the best approach is to determine exactly which features are important to you and find the card that offers those features at the lowest cost possible. That way you’re not paying for features that aren’t important or useful to you.
Loading options
A prepaid card can be more or less useful depending on how easy it is to load new money onto it. Different cards have different options for topping up, so it’s good to look at a few cards to determine which method will be best for you. And the ‘best’ method is typically the easiest and lowest cost (ideally free!) method.
Overseas usage fees
This especially applies if you are thinking of a currency card. Look at whether the card carries a foreign transaction fee or whether a fee is attached to making ATM withdrawals while abroad.
Who is eligible for a prepaid card in the UK?
Most prepaid cards require you to be aged 18 or over in order to apply, although some are targeted at teenagers and therefore have a lower age limit.
You will need to be a UK resident and able to prove your identity. As mentioned previously, prepaid card providers do not look at your credit history, but they do require you not to have been previously convicted of fraud.
Is a prepaid card right for you?
A prepaid card can be useful in the right circumstances. If you are looking to budget a bit better, a prepaid card can allow you to do that as it does not allow you to overspend. You can load the card with the balance that you need to see you through the month and stick to it.
Prepaid cards are also useful if you have a poor credit history and are struggling to get approved for a other types of cards, as they do not conduct a credit check. However, do bear in mind that unless the card comes with a credit rebuilder programme, your credit score will not improve by using a prepaid card. If that is something you are looking at finding a card for, then it is worth considering a credit rebuilder card instead.
A prepaid card is also useful if you have teenagers. There are prepaid cards available to those under 18, or some cards allow you to add an under-18 as an additional cardmember on the account. The teenager could then use the card for their own purposes, but you would still be able to view their account activity online.
If you are planning to travel, a prepaid card may also be a good fit for you. It avoids you having to carry cash in the local currency, and prepaid currency cards often offer competitive exchange rates.
The key thing to consider before taking out a prepaid card is what it will cost you. Consider how you are going to use it and whether what you plan to use it for can be done instead with a debit card in order to avoid prepaid card fees.
Frequently Asked Questions
-
Prepaid cards are cards that you load with cash. You can then use them for everyday spending in shops or online. Basically anywhere cards are accepted.
They typically do not offer any credit facility. Which means you can only spend what you have loaded onto the card. This makes prepaid cards a useful financial tool if you are looking to budget.
As prepaid card providers in the UK do not require applicants to undergo a credit check, prepaid cards are also a good option if you currently have bad credit.
-
Yes, you can use prepaid cards online. Because most prepaid cards are associated with major card networks like Visa, Mastercard, and American Express, you can use the card where those cards are accepted.
But keep in mind that there are limits on the places you can use prepaid cards. As long as you know the full amount of what you're purchasing when you use your card (not pre-paying for a hotel bill, for example), you're able to use the funds available on your card as you would a debit card.
-
No, prepaid cards don't allow you borrow money. You're only able to spend the funds you've loaded onto the card.
-
Prepaid cards often offer the same level of security as debit cards. You're less likely to be affected by fraud when traveling abroad or using the card online as they are PIN protected and not connected to your bank account.
For most prepaid cards that have contactless enable capabilities, it is required to enter your PIN upon first use of the card and after several consecutive uses of the contactless feature in a day.
However, it's important to note that prepaid cards aren't covered by the Financial Services Compensation Scheme (FSCS). That means that if the provider collapsed, the money on the card isn't guaranteed to be protected.
That said, some prepaid cards are backed by other forms of protection, so it's important to read the fine print when applying for a prepaid card to make sure you're selecting one with adequate protection.