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Prepaid debit cards – what are they and how do they work?

Prepaid cards offer the convenience of a credit card without the borrowing – read our guide to find out how prepaid cards work

Prepaid debit cards are much like standard credit or debit cards, with the key difference being that you need to pre-load money onto the card before you’re able to spend.

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Prepaid cards can be a useful way of budgeting, as well as paying for things in shops or online, or withdrawing money at a cash machine, or spending money abroad.

The top UK prepaid debit or credit cards on the market

In the UK prepaid cards are normally issued by MasterCard, Maestro or Visa, and can be used wherever these payment methods are accepted.

They work by simply transferring money from your bank account or loading the card with cash at any Post Office or shop with PayPoint or Payzone facilities.

Some prepaid cards will allow you to top up with a credit or debit card online, giving them a reasonable level of flexibility.

As you can’t borrow money you don’t already have on the card, it’s impossible to get overdrawn or get into any debt, so they could be useful to those with bad credit or who have been refused credit and want to get back into positive financial management habits.

It’s likely you’ll have to pay an initial fee for the card but there are some free prepaid credit cards on the market too.

Many of the other benefits of a prepaid card go beyond factors such as debt control, so they may come in handy even if you have a good credit history and can already get a credit card.

Benefits of a prepaid debit or credit card

Prepaid cards can be really useful if you’re travelling overseas. You pre-load them with cash before you go away, making it harder to overspend than if you’re only using a debit or credit card, which could also be subject to expensive charges.

Prepaid cards often come with competitive foreign exchange rates, some of which are better than the rates on the high-street.

People that may benefit from prepaid cards include:

  • Students wanting the convenience of a credit card without the risk of running up debts
  • Parents looking for a budgeting tool for their teenage children
  • People unable to get a credit card or bank account and are looking to build their credit rating
  • People who have just moved to the country and have found difficulty opening a bank account or getting a credit card

 Prepaid credit card

A prepaid credit card will not typically offer you any kind of credit facility, but if you don’t like the idea of being in debt, you can get a charge card. This is a form of credit card that you have to pay back in full at the end of each month. So is like having very short term credit. Often a charge card offers rewards and other benefits as an incentive for spending on it.

Using prepaid cards for travel money

Some prepaid debit cards will allow consumers to make commission-free purchases abroad and this could be an easier way of managing your holiday spending than getting a credit card and perhaps it could be safer than exchanging cash.

Like all other prepaid cards, you just load up the money and spend what you have, so it can also help reel in your travel spending.

If you prefer to take cash on holiday then you could also keep the prepaid card loaded with a small amount enough to keep you going in an emergency.

Most prepaid cards carry the MasterCard or Visa symbol, so you won’t have any trouble trying to find restaurants and shops abroad to spend it in.

prepaid debit and credit cards - prepaid visa card - prepaid mastercard - uk prepaid credit card

Many prepaid cards carry the Visa or MasterCard logos, so you should be able to use them abroad without a problem

If you’re going away for a short period, then cash is generally the best option if you pay close attention to the exchange rate and compare the market effectively, but for a long trip, you’ll want to avoid carrying so much cash, and that’s where prepaid cards come into their own.

Is it better to use a credit card for travel?

Most credit cards will exchange at the Visa or Mastercard daily exchange rate, which is often very competitive. However, if you are not careful you could be hit by overseas usage fees for using your card abroad, these will typically be somewhere between 2 and 3% per transaction.

However, there are cards that charge no fees when you use them overseas, these are very useful to have when overseas and don’t require you to load up with cash (so you can avoid loading fees), making them cheaper over all, provided you pay off your balance in full each month.

The Post Office card gives you fee-free overseas spending making it a good choice for overseas spending, but it also includes 18 months 0% interest on any balances you transfer to the card.

There are many other 0% overseas fees cards, so shop around to find one that’s right for you.

Cost of using a prepaid card

One of the downsides to prepaid cards is that they’re often subject to all sorts of charges which can vary significantly from card to card. Some of the fees you might see include:

  • A fee of £5 to £10 to buy the card (although there are some free prepaid credit cards)
  • A fee of 2% – 3% each time you load money onto the card
  • Transaction fees – each time you use the card to buy something or withdraw cash
  • Monthly fees – some cards charge a fee of £1 to £12.50 for having the card each month
  • Extra fees if you use the card overseas and replacement card fees if the card is lost or stolen
  • Upgrade and cancellation fees
  • Fees to transfer money off the card

Most cards will have at least one of these charges associated with it, so it’s important to do a comparison of the top prepaid cards on the market to see what charges you get and what benefits you’re prepared to pay a little extra for.

Prepaid cards vs cash and debit and credit cards

Prepaid cards are somewhat safer than debit and credit cards as they’re not linked to your bank account or credit card, making them much less open to fraudulent use.

If a debit or credit card is still in your possession when you’re the victim of fraud, you’ll get back 100% of any losses.

If you lose your debit or credit card or it’s stolen, the most you can be liable for is £50 and even this fee is usually waived.

Unlike credit cards, most prepaid cards unfortunately don’t fall under Section 75 of the Consumer Credit Act – this makes the credit card provider jointly liable if something goes wrong with a product or a service you’ve paid for by credit card and costing more than £100 and less than £30,000.

You also won’t earn any interest on any money you load on to a prepaid card.

However, as you can’t borrow money on a prepaid card, you won’t incur any interest or overdraft charges either.

By a similar token, prepaid cards are less likely to improve your credit score as, in most cases, you won’t be borrowing any money or repaying anything, as the money loaded on it is all yours.

If you are keen to find a way to improve your credit score, then a credit builder credit card might be a better option for you.

Company Details Fee

FairFX
0% transaction fee
0% management fees
FreeApply

Caxton
No ATM
No point of sale fees
Free loading
FreeApply

icount
Fee includes bank account
No credit checks
£4.95 for the card
£9.95 per month
Apply

Secure Trust
Fee includes bank account
No credit checks
£12.50 per monthApply

WeSwap
Peer to peer currency exchange
Exchange at the mid-market exchange rate
1% commission
£2 per month during which your account is inactive.Apply

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