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Prepaid Credit Cards

What are they - how to use them

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Page Summary:
PrePaid Credit Cards can be used to pay for goods and services just like a Credit or Debit Card. Money is preloaded on to the Card in order to spend. Their main disadvantage? Costs. This article explains more.
Prepaid Credit Cards - What are they? How to use them
Prepaid Credit Cards are a simple idea - you load money on to the Card and then use it as you would a Credit or Debit Card. They can therefore be used in shops, hotels, restaurants, Cashpoint machines and also online to order goods and services.

Note, although they're generally referred to as Prepaid Credit Cards they don't actually offer any credit.

How Do they work

We all understand Debit Cards - they are similar to Credit Cards but no offer no credit. Instead, money spent is debited directly from our bank accounts in real-time.

A Prepaid card is similar but it is not linked to a bank account. Money has to be preloaded on to the Card and when this is used up the card is effectively useless - until it's reloaded with more money.

Each card comes with it's own PIN (Personal Identification Number) and this is used to pay for goods via a Chip & Pin terminal or to get cash out from an ATM.

In many ways a prepaid card is similar to a Pay-as-you-Go mobile phone. The phone is loaded up with credit and will work until that's used up, or more is added.

Where can Prepaid cards be used
The cards are all issued under a MasterCard, Visa Electron, Maestro or Amex badge. This means they can be used anywhere in the world. If Credit and Debit cards can be used so can a prepaid one.
How to load the Card with money
Credit is simple to add and it can be done at the following -
  • The Post Office
  • PayPoint outlets - found in newsagents, garages, supermarkets, convenience stores etc
  • PayZone - Similar to PayPoint above and in similar locations
  • Telephone - Self-explanatory
  • Online - Either by the issuing card's website or by a bank account

If a payment is made either in Cash or via a Debit Card the amount is usually loaded on to the Card within 30 minutes.

What fees and charges have to be paid
Not all prepaid cards charge the following fees so it is important to check -
  • Upfront fees : £5 - £10. Charged when you take out a Card

  • Monthly fees : £2 - £5. These are levied as an ongoing maintenance fees, not all Cards charge them

  • Transaction fees : Flat rate (£1-£2 per transaction) or a percentage of the purchase price. These are charged when the Card is used

  • Loading fees : 1% - 3% - A fee for recharging the card. Different fees usually apply for reloading via the Post Office, PayPoint, a bank or via the internet

  • Cashpoint fees : 2% - Charged by the Card issuer if you use a Cashpoint machine, even a 'free' one

  • Foreign Exchange fees : 2.75% - 4% - If the Card is used abroad expect to pay these fees. See also - How to get the best Exchange rate for your holiday cash when travelling abroad

  • Cash out fees : £10 - If you want to cancel a card and have the money returned to you
That's an exhaustive list of potential fees I think you'll agree. So much so I would think it's possible to load a Card up with £100 in cash and then pay 10%+ in fees as the money is being spent.
What happens if the Card is stolen
If your card is lost or stolen, you can get your remaining balance transferred to a replacement card. This can then take up to 7 days to arrive.
Advantages - Prepaid Credit Cards
  • Safety when travelling abroad - No need to carry as much cash plus less chance of fraud

  • Impossible to overspend and get into debt - Load £200 on to the Card and you cannot spend £201

  • No credit check - everyone is accepted - Useful if your Credit rating is damaged and you're struggling to get a traditional Credit card. See also - How to repaid a bad credit rating

  • Better than Travellers Cheques - Travellers cheques are old school and often easy to steal. Also, if you have the right prepaid card for spending abroad it will probably work out cheaper than taking travellers cheques (see Buying Tactics further down this page)

  • Increased security when shopping online - Many people are concerned about buying goods and services over the internet with a Credit or Debit Card. If so, use a prepaid card - it will be more expensive though

  • Manage your spending online - Most Prepaid Cards come with internet access so you can keep track of your spending

  • Transfer money abroad - Useful if you have a relative or son/daughter abroad, perhaps on a Gap year. Cash can easily be transferred to them and almost instantaneously

  • Gold Card status - Some Prepaid Cards look just Gold Credit Cards. Useful if you need to show off

  • Prepaid Gift Cards - These work in a similar fashion to a gift card but have hard cash loaded on to them. Give them to someone heading off on holiday. Note, you don't have to prove your ID when buying a one of these but they cannot then be reloaded with new cash

  • Bill paying - Prepaid cards act like Debit cards so they can be used to pay bills, online or on the telephone

  • Cheaper than Western Union - Many people send money from the UK to relatives or friends abroad using Western Union, but it's not cheap. The right prepaid card will probably work out cheaper - but the person who's receiving the cash will need to be in possession of the card

  • Wages can be paid in - Some people don't have bank accounts, or if they do they don't want their wages paid in - If so, organise for the money to be deposited on to your prepaid card
Disadvantages - Prepaid Credit Cards
  • High Fees - By far the main negative. The list of potential fees (listed higher up this page) can really add up to make these cards incredibly expensive to use

  • Limited or no Purchase protection - Credit Cards offer strong financial protection when buying goods/services - any problems and you are refunded. Prepaid cards offer little or no protection. More information on Credit Card protection

  • Expiry date - Prepaid cards expire after 1 - 3 years. Many card providers won't reimburse money that's still left on an expired Card

  • No interest - If you keep a cash balance on the Card no interest is payable

  • Possibly promotes spending on plastic - Many of these Cards are aimed at the under 18s. Some debt charities have expressed concern that youngsters, if they use them extensively, might develop unhealthy attitudes to using plastic
Buying Tactics - What To Look Out For
How to find the best Prepaid Card
The best way to find the most suitable prepaid card for your needs is to -
  1. Work out how you're going to be using it, and then
  2. Focus on the costs, ie go with the Card that is cheapest to use - noting how many times the card will potentially be used over a period of time

For example, John might want to use a prepaid card when on holiday. If so he should obviously look for the card that's most competitive when used outside the country.

But Julie is worried about online security and has no interest on using her card when aboard. She needs to find the one that is the cheapest to run and use here in the UK.

Tip - Try to steer clear of cards that levy a monthly management fee. These look exceptionally bad value.

LearnMoney Comment :

Prepaid cards have their role and might be useful for certain people. But they're expensive to fund and use.

However, if one is right for your circumstances always go for the cheapest Card to run. That will take a small amount of research but it will save you money.

See also

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