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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.

Guide to how prepaid cards work?

Prepaid cards offer the convenience of a credit and debit card without the borrowing. As they don't require a credit check, 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. As you're not being extended credit, you don't need to pass the same credit check.

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.

What is a prepaid debit or credit card?

Strictly speaking, prepaid cards are a category of card unto themselves, and neither prepaid credit cards, nor prepaid debit cards exist.

Whilst a prepaid card could be considered to be something like a debit card, as it does effectively 'debit' money from an account, it's a slightly different product.

Unlike a debit card, a prepaid debit card doesn't have a bank account associated with it, and you wont usually be able to set up direct debits (some prepaid cards may offer this service though, so it's worth checking). They also do not earn any interest on any money deposited in the account.

There's no such thing as a prepaid credit card, because a prepaid card will not typically offer you any kind of credit facility.

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.

How prepaid cards work

It's 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. For minimal fuss, look for a card that you can load online without leaving the house.

Many prepaid cards charge fees to load cash, but could also charge fees for withdrawing from ATMs. It's worth reading a prepaid cards terms and conditions and checking all the small print 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.

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. Though 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.

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 and 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.

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) and come with competitive foreign exchange rates, often much better than the exchange rates on the high-street.

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

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.

Using prepaid cards for travel money

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

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 card should accept these type of cards.

So, you shouldn't struggle to be able to spend on your card.

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.

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.

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

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 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.

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'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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