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How do prepaid debit cards work?

Prepaid cards are a plastic payment card, much like standard debit or credit cards. However you must pre-load money onto the card before you're able to spend.

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Guide to how prepaid cards work?
Prepaid card

What are prepaid debit cards?

Prepaid cards are a plastic payment card, much like standard debit or credit cards. Unlike a credit card you must pre-load money onto the card before you're able to spend. This means you can never spend money that you cannot afford to repay, which can help you manage your bad credit better.

Do I need a credit check to get a prepaid debit card?

Prepaid cards offer the convenience of a credit and debit card without the borrowing. They don't require a credit check and so they could be useful to someone struggling with bad credit or someone who has been refused credit in the past.

A prepaid debit card can help you manage your money better and help you get back into positive financial management habits. As you are not being extended credit, you don't need to pass the same credit check as you would for a traditional credit card.

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.

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How are prepaid debit or credit cards different from ordinary credit cards?

Strictly speaking, prepaid cards are a category of card unto themselves.

A prepaid card could be considered to be something like a debit card, because it does 'debit' money from an account.

Unlike a debit card, a prepaid debit card doesn't have a bank account associated with it. You won’t usually be able to set up direct debits via a prepaid, although some prepaid cards may offer this service though, so it's worth checking.

You do not earn any interest on any money that you have loaded up onto the card.

Find out more about how Credit cards work

The closest thing to a prepaid credit card is 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 it's like having very short term credit. Often a charge card offers rewards and other benefits as an incentive for spending on it.

Guide to prepaid travel card - body image

How do prepaid cards work?

There are a number of costs to bear in mind when you take out a prepaid debit card.

It is likely you'll have to pay an initial fee to take out the prepaid debit card or credit card (but there are several free prepaid cards on the market).

You will need to pre-load the card with money. You can do this from a bank account, often simply online or via an app. And you can usually add money to prepaid visa cards at a Post Office or shop with PayPoint or Payzone facilities. Look for a card that you can load online without leaving the house.

Many prepaid cards charge fees to load cash. Some also charge fees for withdrawing from ATMs. It is worth reading the terms and conditions and checking all the small print of a prepaid card so you understand all the associated costs.

Once your card is loaded with cash you can spend on your prepaid card as you would with any debit or credit card. In the UK prepaid cards are normally issued by Mastercard or Visa and can be used wherever these payment methods are accepted.

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Do I need to pass a credit check to get a prepaid card?

You don't need to pass a credit check to get a prepaid credit card.

However, prepaid card providers may look at your credit file for anti-fraud and money laundering purposes. The good news is that this shouldn't leave a mark on your credit file in the same way as applying for credit card.

There may some very basic requirements to be approved for the product, such as being 18 years or older, though these rules will be less onerous than for a normal credit card.

What are the benefits of a prepaid card?

You can't spend money you don't already have with a prepaid card, so it's a good way to avoid becoming overdrawn or getting a negative credit card balance. 

If you try to purchase something that exceeds the balance of the card, the transaction will simply be declined. There shouldn't be any penalty, like you might be subject to if you overdraw your current account.

Prepaid debit cards can be very useful if you have been struggling with your finances and you need some help in managing your spending and your debt.

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.

There is a subset of prepaid cards for travel, theses prepaid cards are often free to use overseas (but using at UK ATMs and payments might come with a surcharge). They come with competitive foreign exchange rates, often much better than the exchange rates on the high-street.

How to pay off credit card debt

Who might need a prepaid card?

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

What are the costs 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 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 is 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.

How long does it take to get a credit card?

Is it worth using a prepaid card abroad?

Some prepaid travel cards allow you to make commission-free (i.e. there is no-foreign-transaction fee) purchases abroad. In addition to this they will often come with highly competitive exchange rates.

So it may be a cheaper and more convenient method of carrying and spending cash than traditional traveller’s cheques.

How to find the best card for travel abroad

As with other prepaid cards, you just load up money and spend what you have, so it can also help stop you spending too much on holiday.

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 are provided by MasterCard or Visa, whose cards are widely accepted worldwide. Basically anywhere that accepts cards should accept these type of cards. 

So, you shouldn't struggle to be able to spend on your card while you are abroad or on holiday.

How to use a credit card abroad

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 aren't 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.

So depending on which type of credit card you have, a prepaid travel money card might be a cheaper and more flexible option.

However, there are credit 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 overall, provided you pay off your balance in full each month.

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

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Are prepaid cards safer than cash?

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 is stolen, the most you can be liable for is £50 and even this fee is usually waived.

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

Section 75 – How credit card protection works

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.

How do I build credit without a credit card?

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

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Find a credit card with no foreign transaction fees.