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Guide to prepaid credit cards

The way UK consumers are paying for things is changing; more consumers are choosing to pay by plastic as fewer carry cash.

As debit cards are associated with a bank account and credit cards to a credit facility, it is also possible and easy to overspend. With millions of UK consumers already in financial difficulty from the economic downturn, adding to debt should be avoided.

Prepaid credit cards are a relatively new type of payment method that combines the convenience of a credit or debit card without the risk of getting into debt or needing a bank account.

These cards look similar to traditional credit or debit cards, they’re the same size, feature a chip and long card number, but that’s where the similarities end.

Instead, prepaid cards work in a similar way to a pay-as-you-go mobile phone. The user loads cash onto the card, which can then be used for spending like a credit or debit card. However, if there is no money loaded on the prepaid card, it cannot be used.

Prepaid cards can be a useful spending tool, reducing the need to carry cash around, but also to help cardholders get a handle on budgeting, and not allow for consumers to spend outside their means.

How do prepaid cards work?

Prepaid cards are very easy to use and apply for. Instead of long application processes as with credit and debit cards, users simply apply by completing a quick online form.

Some cards do have a card fee, which may need to be paid at the time of application, but others are free. This is something that individuals will need to consider before applying.

Once the card arrives in the post, it might need to be activated. After that, it will need to be loaded with cash before it can be used for spending. There is usually a minimum and maximum loading amount.

Money can be loaded onto cards in different ways:

It is easy to assume that these cards won’t be accepted in store, but as the vast majority are issued by Visa, Maestro or MasterCard, they are accepted by most retailers in the UK.

Who are prepaid cards for?

Prepaid credit cards are available to everyone, but as they do have a number of fees associated with them, they might not be suitable for everyone.

People that can use credit or debit cards without any problems or worries about overspending should probably stick to their usual payment method as they likely have more benefits than prepaid credit cards.

However, for those that intend to use prepaid cards for specific reasons or are unable to get a debit or credit card, they can be a great choice. Some examples include:

Children - Some bank accounts offer debit cards to youngsters, but most only offer a cash card until they reach 16 or 18, and credit cards are not available to people under the age of 18. However, most prepaid credit cards either allow teenagers to have their own card or be a cardholder on a parent’s account.

Low credit score - The second group of people that might not be able to access a credit or debit card are those with a low credit score. Basic bank accounts don’t tend to offer a debit card to account holders. Some prepaid credit cards even have a credit-builder facility to help improve credit ratings.

Overseas spending - Individuals that plan on using plastic when travelling abroad might be able to benefit from a travel prepaid card. There are specific cards for overseas spending that offer reduced fees. It is safer than carrying cash and can be cheaper than buying foreign currency.

What fees are associated with prepaid cards?

Prepaid credit cards do work slightly differently to credit and debit cards as they charge a number of fees for using them.

Application fees - Some companies charge an initial one-off fee to apply for the card. This varies between providers, but is usually £5-10.

Loading fees - There are a number of ways to top up the card, but most charge a fee of around £1 or 3% for doing so. Replacement card fee - In the event that the card is lost or stolen, the provider will replace it at a cost. The same applies if the card has expired.

Transaction fees - There is sometimes another charge when the card is used for spending, but some providers do waive this fee.

Cash withdrawal - Users that withdraw money from an ATM will be subject to another fee,which will vary, but is usually between 50p and £2.

Inactivity charge - As prepaid card providers want encourage spending, some charge a fee if the card isn’t used for a certain amount of time.

Prepaid card benefits

As with any type of financial product, there are advantages and disadvantages to using prepaid credit cards. Advantages

No credit check - as there is no credit facility with a prepaid card, they are available to all UK residents, regardless of credit rating.

Suitable for teenagers - prepaid credit cards will help teach children basic money management skills and allow them to control their own spending.

Help to budget - when using other payment methods, it’s easy for people to spend more than they realise, whereas a prepaid card can help with budgeting.

Improve credit rating - some prepaid credit cards come with a credit-builder facility, giving cardholders repayment history on their report

Used as a bank account - as wages can be paid straight onto the card, prepaid credit cards can be used as an alternative to a basic bank account

Disadvantages of prepaid cards

Fees - the biggest downside to prepaid cards is the number of fees, which apply to almost everything the card is used for.

Less protection - using a credit card for purchases offers protection under Section 75 of the Consumer Credit Act, but most prepaid cards don’t offer this.