A Guide to Prepaid Credit Cards

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What You Need to Know

  1. Prepaid Credit Cards work like pay-as-you-go mobile phones, allowing you to top up your account when you want but not allowing you to spend more than is in your account.
  2. You can use a Prepaid Credit Card as you would any other credit card, to buy goods online, on the high street or to withdraw money at an ATM.
  3. You cannot spend any more than your balance, meaning you will have to top up once this hits zero. It is impossible to borrow money or run up debt on one.
  4. Other advantages include low risk of loss of money to theft or fraud, a high level of acceptance across the country and further afield, and the possibility of improving your Credit Score.
  5. Popular uses for Prepaid Cards include for Pocket Money for young people and for taking holiday money abroad safely and securely. They are also ideal for people who are unable to get a bank account or regular credit card.
  6. However, most providers will charge a small admin fee for a new prepaid card, and some will also charge a fee for topping a card up, or making ATM cash withdrawals.
  7. Most major credit card providers offer prepaid cards.

What are Prepaid Credit Cards?

The Prepaid Credit Card is a relatively new addition to the plethora of financial services consumers in the UK can access these days, but they are rapidly gaining in popularity with all sorts of people.

The name ‘Prepaid Credit Card’ is actually a bit misleading, because while they can be used in much the same way as you would use a credit card, they involve no risk of running up large debts and incurring heavy interest charges.

Instead they are cards which you add money to yourself, and which then allow you to use them in the same way as a credit or debit card to pay for items in stores or online. They can also be used in most cash machines as well.

The key difference is that when the money you have added to them has been spent, they stop working until you add more money. You cannot spend more than you put on them and at no point can they be used to borrow money. They are also not linked to your bank account in any way.

They are becoming increasingly popular with people who want to control their spending, for people going abroad who want a safe and secure way to carry money with them, and for parents to give a weekly or monthly allowance to their children.

How They Work

A Prepaid Card works in much the same way as a pay-as-you-go mobile phone. Before you use the card (or the phone) you have to load it up with money, and once you have used up that money, the card (or phone) will stop working until you have added more money again.

Cards can function slightly differently, but for the overwhelming majority, you can top up money online and over the phone, and many also have the facility to add money in the Post Office and some corner shops and other outlets as well.

Once they are loaded with money, they can be used just like any other credit or debit card. You can make purchases online, buy items in stores, and even withdraw cash from an ATM.

The only other difference you will encounter is when they have run out of money, or when you try to buy something that costs more than the amount of money left on the card. When this happens the card will not work and you will either have to top it up, or not make that purchase.

Prepaid Credit Cards: The advantages

So the process of using a Prepaid Credit Card is simple enough. But why would people go to the effort and inconvenience of using one, when almost everyone already has access to credit and debit cards. Firstly there are a number of compelling advantages for all consumers, including:

  • No interest to pay and no penalties for late payments.
  • There are no tie-ins. You can use a prepaid card as little or as often as you want.
  • You should be able to get a prepaid card regardless of your credit history.
  • Most of the big provider’s prepaid cards can be used in the majority of high street stores, ATMs, online and overseas.

Beyond these, there are a number of significant advantages worth highlighting in more detail:

  • No Overdrafts or Debt Risk: With a Prepaid Credit Card, It is impossible to go into overdraft or to run up any debt. You can only spend the money you have put on the card and there is no overdraft facility available on any Prepaid Credit Cards.

They are also not linked to any bank account, so you cannot just dip into your funds to make that impulsive extra purchase either.

If you want to spend more money than you have on the card, you have to consciously add funds to the card. The act of doing serves as a great control, because it gives you time to think about the purchase you are making and whether it is money you really want to spend. If you are a compulsive spender, or living on a tight budget, this extra step can help to reign in your spending.

  • Improve your Credit Rating: Some Prepaid card providers also provide a facility which allows you to improve your credit rating whilst using the card as well. Prepaid Cards are a popular option for those with poor credit ratings who are unable to get a Credit Card or even open a Bank Account with a Debit Card. Some cards help you to improve your all-important Credit Rating and so give you the chance to apply for these types of financial products in the future.
  • Personal Safety: Prepaid Cards are a safe way to carry money around with you. If you card is lost or stolen, you can make a single phone call to the card provider and they will cancel your card and return the money on it to you in full. Some providers may charge a small fee for this.

If you are unlucky enough to not realise your card has gone until it has been used, you can also rest assured that the maximum amount of money you will lose is what you have on the card.   

  • Limited Fraud Risks: The same rules can also be applied to the risks of card fraud. Because the card is not linked to your bank account, there is only a finite amount of money that can be taken by fraudsters who might have managed to clone your card or get hold of your details.

As with most regular bank cards, most Prepaid Card Providers will also offer you the facility to contact them if there is a transaction on your card that you don’t recognise, and they will usually be happy to refund the money to you.

  • Perfect for Pocket Money: One demographic which Prepaid Cards have proved extremely popular with is teenagers and children, although the main advantages actually lie with their parents.  

Most Prepaid Card providers don’t have an age limit on the card meaning that as soon as you think your kids are ready to have their own card, you can give them one. For kids it’s great to feel all grown up with your own bank card, and for parents there are a range of facilities which make a Prepaid Card better for young people than cash.

The risk of them having their pocket money stolen is diminished significantly. Some providers will offer optional parental restrictions to stop the card being used for such purchases as online gambling, or purchasing adult material. And also a Prepaid Card will keep a record of where it has been used, meaning that parents who want to monitor their child’s spending can do so.

  • Acceptance: Another big advantage of Prepaid Credit Cards is the extensive level of acceptance they enjoy. Providers include some of the biggest banks, building societies, and credit card companies in the world. This means that most Prepaid Credit Cards can be used anywhere in the UK where a debit or credit card is accepted. For people wanting to use them like everyday cards, this is an essential feature.
  • Holiday Money: Losing your credit card, cash, or travellers cheques on holiday can be a nightmare, causing a great deal of stress and potentially meaning you spend more time dealing with the police or on the phone to your provider or insurance company than you do relaxing.

But taking your money on a Prepaid Card can do away with this risk, and this is why they are becoming hugely popular with holidaymakers. Online top ups mean you can add money to the card while you are away and keep the amount on the card as low as you like. If it is stolen or lost, the safety features mentioned above can be used anywhere in the world.

They are also available in some different currencies, although not all (see below for more on this).

  • Direct Debits and Standing Orders: A final benefit is that a select number of cards will also let you to set up Direct Debits and Standing Orders in the same way that you can with a Bank Account. This is not a common facility, but is available with some providers, and is a great option for those for a poor credit rating who are unable to get a regular bank account.


Prepaid Credit Cards: The disadvantages

It might seem that the case for using a Prepaid Credit Card is almost overwhelming, but there are also some disadvantages which should be taken into account as well:

  • Fees and Charges: Many Prepaid Credit Cards do require users to pay certain fees to use the product. These can include application fees and potentially even a small monthly fee. Other potential fees include a topping up fee, a transaction charge, and an ATM withdrawal charge.

Which of these are applied and how much they are can vary widely between providers and products, so be sure to read the details beforehand and be sure you know the charges you are going to be incurring. If you know you are only going to be using your card for certain types of transaction, it is worth using a price comparison website to find the best card to minimize the cost of those transactions.

  • Potential Embarrassment: Since you can’t get any credit on a prepaid card, it is quite likely that at some stage you will find yourself at the check-out without enough money to make your payment. This can be embarrassing and inconvenient, but is still easily remedied with a quick phone call or visit to your providers’ website, and once you have been using one for a short while, keeping on top of your balance should become second nature.
  • Acceptance: Whilst acceptance is listed as an advantage, with some cards it can be a disadvantage as well. There are cards which will not be accepted in all shops and online retailers, so do confirm this before signing up. It should also be noted that there are also some services which you cannot use any Prepaid Credit Card for. These include hiring a car and paying for petrol at the pump.
  • Compensation Schemes: With a regular bank account, the Government offer a guarantee on the first £85,000 you hold there. There are also various rules requiring the bank to protect your funds. Your Prepaid Credit Card provider may not necessarily offer this.

If the company is just registered with the Financial Conduct Authority, they must keep your money separate from their own company money in case they go bust, but this is not as strong as safeguard as you have with a banks. Check the details before signing up and make sure the compensation available is something you are happy with.

  • Currencies: Using Prepaid Credit Cards for holiday money is a key advantage, but you cannot get a Prepaid Credit Card for every currency in the world. Currently there are three types of card you can get:

o    Euro

o    US Dollar

o    Global

The Euro and US Dollar cards are self-explanatory and can be used anywhere where those currencies are legal tender. The Global card will hold your money on it in UK Pound Sterling, and convert it into the local currency when you use it. This can make it more expensive depending on the exchange rate you get, and it also makes it harder to keep track of how much you are spending. The only way to check is to log onto your account and check your balance.

How to Get a Prepaid Credit Card

Most major credit card firms now also offer prepaid cards, giving you the chance to choose between dozens of products.

Generally speaking, applying for a card is quick and easy and can be done online or over the phone. It is important to give accurate information but this should be relatively straight-forward as most cards use a simple step-by-step application process.

What may take you a little time is comparing the different cards available to you. Different providers will charge different fees and offer different services so it is important to ensure the card you get does everything you want it to and you know what it will cost to use.

Further Reading



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