20 August 2014 : 
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Prepaid cards have risen in popularity over recent years, particularly in the travel industry and consumers unable to access a bank account or with poor credit, although people from all walks of life are finding them to become incredibly useful.

Should we be wary of prepaid cards?

A prepaid card looks very similar to the credit and debit cards you will be used to seeing every day. You can use the card in exactly the same way too, either by entering the details over the internet or by using Chip & PIN in stores. There are two major differences between prepaid cards and credit or debit cards, one being that the cash has to be pre-loaded on to the card, and the other that these cards are not protected under the Financial Services Compensation Scheme (FSCS).

There are numerous benefits to prepaid card, the most recent perhaps being the number of initiatives being set up where paying with prepaid cards avoids administration fees. The most notable firm taking part in such a scheme is the budget airline Ryanair. Other advantages to this type of payment method are:

  • The lack of credit facilities, meaning that you are unable to run yourself into debt without realising
  • An improvement in managing your budget
  • Less risk of identity fraud as there are no personal details attached to the card

Whilst there is nothing wrong with using a prepaid card, either for specific activities such as booking Ryanair flights, or as an everyday payment method, it is important to note that you will not have any protection from the FSCS in the event the provider goes bust or under Section 75 of the Consumer Credit Act for purchases. Mark Neale, Chief Executive of the FSCS said that consumers must ask about the prepaid card company about FSCS protection before taking out any products.

But, what does this actually mean?

Well, picture these two scenarios: in the first you have £500 deposited in your current account, and in the second you have £500 loaded on to your prepaid card which is associated with the same bank or building society. In the first scenario should the bank go under the bank would be liable for repaying your cash, but in the second they would not.

As a precautionary measure, it might be wise to use your prepaid card as a place to load cash for spending immediately, rather than a place to store large sums of cash. Large amounts of cash should always be deposited in to a bank account.

You may have heard of ‘Section 75’, it is regarded as one of the most important pieces of legislation for consumers as if you purchase something over the value of £100 with a credit card, the provider is equally liable for refunds. This means that if something goes wrong with the purchase the credit card company will have to provide you with a refund directly. This protection only applies to credit cards, not debit cards or prepaid cards.

Do I have any protection?

If you use a Visa prepaid card, you will have more protection than others due to the Visa Chargeback Scheme. Unlike Section 75 this scheme is not the law but still offers similar protection on purchases when using a Visa debit or prepaid card. Chargeback asks the card provider to refund the transaction in the event of any problems with the purchased goods, such damage, not as described or not arriving.

So should we be wary of prepaid cards?

By taking the time to do a little research about prepaid cards and the protection consumers have you should be able to shop and use a prepaid card with no worries at all. There are some extra steps that you may need to consider to ensure that you are safe, such as the Visa Chargeback, and not depositing large sums of cash on to the card. However, the advantages of these cards far outweigh the slight disadvantages of minimal protection if you use the card wisely. If you are making a deposit for a large purchase, for example a car or a holiday, it may be beneficial to use a credit card to ensure that you are fully covered under Section 75, but a prepaid card is ideal for day-to-day spending.

Jemma Porter - Image Written by :

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Jemma is a news & research reporter for compareandsave.com.

Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money.

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