Prepaid Cards - How They Work and How To Use Them

Prepaid cards are already a big success in the US and it looks like they will soon be as popular over here. Some people are even predicting they could account for 1 in every 20 card transactions in just two years’ time.

A prepaid card operates in a similar fashion to a gift card from a retailer. You choose how much cash to put on it and then you can use it just like a credit card in a shop or on a website.

You can also use it to withdraw cash and some cards even let you take out your cash abroad. You can top up your prepaid card using a debit card, cash or at one of the many retailers displaying the PayPoint or Payzone logos.

The pros of prepaid cards

Getting a prepaid card is very simple and doesn’t require any credit checks or for you to have a bank account. Some cards even let you improve your credit rating by turning their fees into a loan and making an entry on your credit report as you pay it off. This allows you to build up a positive credit history.

As prepaid cards don’t allow you to spend more than you’ve put on them, they are useful for those trying to stick to a budget. Many cards have a minimum age of 18 but some can be used by children as young as 10, allowing them to get experience of managing money while the parent retains control over how much cash is put on them.

You can even bar them from making payment on certain undesirable websites. Companies can use them for their employees and some firms with migrant workers are even arranging for wages to be paid onto these cards, due to the difficulty these people can experience in opening a bank account

Prepaid cards can either be backed by Maestro, Mastercard or Visa. The latter two in particular are widely accepted around the world so you can use them wherever you can use a credit card. Some prepaid cards will let you use touchpads to approve small transactions under £10, similar to the Oyster Card. For larger amounts, payments are validated by a PIN number.

Foreign exchange prepaid cards allow you to withdraw funds in euros or dollars. With a competitive exchange rate, they are more convenient than travellers cheques and can offer better value than using your normal debit or credit card abroad.

Those worried about online fraud can also benefit. As prepaid cards are not linked to a bank account, you can only lose whatever cash you’ve loaded onto them.

Finally, many cards also offer discounts on certain items, in some cases as much as 15%.

So what are the downsides?

The main disadvantage with prepaid cards is the vast array of fees they charge. When you’re dealing in small amounts, they can be substantial in percentage terms. The different charging structures can also make it quite difficult to compare one card against another.

Most prepaid cards have an application fee and a cancellation fee. Some have a monthly charge or an annual renewal fee, while others have an inactivity charge which kicks in after a few months if you haven’t used them.

A fee is usually payable if you need a replacement card and many prepaid cards make a charge when you load them up with cash or use them at an ATM. Others even charge you a small percentage fee each time you use them to spend money. It’s also working checking what rates call to customer helplines are charged at, as these can be quite steep for some cards

There are couple of other downsides when it comes to regulation. When you spend more than £100 on a credit card then you are protected in case the retailer goes bust and there is a problem with the goods. This protection is given by s75 of the Consumer Credit Act. Unfortunately, this doesn’t apply to spending on a prepaid card.

This means you need to have an idea of how you’re going to use a card in order to assess which one offers the best value. Of course, this may not be easy if you haven’t had a prepaid card before!

Finally, as prepaid cards are not regulated there is a risk you could lose any money you have on the card if the company behind it was to go bust. This risk can be minimised by choosing a card backed by a well-known firm but it’s worth considering, particularly if you think you might carry a large balance on your card at times.