Are prepaid cards the answer to our foreign spending woes?

Thousands of British holidaymakers have jetted off for an Easter break, and many will pour money down the drain on unnecessary foreign usage fees when they use their credit and debit cards abroad.

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Research from Nationwide revealed that UK holidaymakers wasted more than £650million on foreign currency usage fees last year. Most banks and building societies levy a ‘loading fee’ every time you use your card abroad. The fee is typically set at around 2.75% - with up to 3% charged on cash withdrawals and purchases made outside the UK.

With both credit and debit card providers implementing a series of fees, as outlined in the article 'Beware the hidden costs of overseas spending', there is strong support for prepaid cards as an alternative payment method.

 

What are prepaid cards and how do they work?
You’re probably familiar with the concept of prepaid cards already – they work in the same way as a prepaid gift card or prepaid phone card. You simply pay money on to a card and this can be used at retailers or online merchants.

Most prepaid providers allow you to load the card using cash, a bank transfer or a credit card. You can also place money on them in convenience stores wherever you see a Payzone or Paypoint sign and over the internet.

The key advantage of prepaid cards is that there is no risk of building up debts. You can only use the money that’s on the card and as a consequence there are no interest charges, no debts to pay and no risk of sinking into an overdraft.

What should you be wary of?
Unfortunately prepaid cards do carry fees of their own, these include:

  • Application fees – The initial charge for obtaining the card.

  • ATM withdrawal fees – One of the key ideas of the prepaid card is that you don’t need to withdraw cash as it’s already loaded on to your card. However, if a withdrawal is necessary you will usually be charged.

  • Top-up fees – Some providers will charge you for the amount of money you put on to the card. This could be a set fee per top-up, or a percentage of the amount you load on to the card.

  • Monthly/annual fees – For the length of time you hold the card.

Other fees to watch out for include a charge for every replacement card you order and currency conversion fees for overseas use.

The good news about these fees however, is that they are more transparent than those that accompany debit and credit cards. Unlike a credit card you can’t be charged for interest, late fees, balance transfer fees and so on – the typical ways card providers make their money.

So who are prepaid cards right for?
Prepaid cards are very popular with the four million people who don’t qualify for a bank account – perhaps because of poor credit or because they are immigrants joining the country without a credit profile. Students too have embraced prepaid cards as a great way of budgeting and managing their money.

Indeed prepaid cards have proven immensely popular among gap-year travellers as they provide welcome reassurance to parents who know they can always add money on to the card with a simple transaction, should their student son or daughter need it.

Above all however, prepaid cards have become a legitimate alternative to traveller’s cheques. They save you carrying bundles of cash with you, they’re easy to replace and some providers even offer 0% foreign exchange fees. Before you travel however, be sure to check the top-up methods permitted on the card – some will only allow you to top up face-to-face, whereas others will allow you to top-up over the internet or on the phone.

How do you find a good prepaid card?
In the United States, customers have quickly adopted prepaid cards with two out of three US consumers having purchased a prepaid card in 2006. The value of prepaid cards transactions is expected to top $185billion this year.

Their popularity is now catching on here in the UK too. Prepaid cards have become the fastest growing product with companies like the Post Office, lastminute.com, CaxtonFX, FairFX and Club 18-30 all launching products.

With so many deals available, you should shop around for prepaid cards just as you would for a credit card.

The FairFX Euro Currency Card is one of the leading deals on the market and there is no card application fee when you order more than £500. FairFX also offers a Dollar Currency Card for travellers heading to the USA.

The key is look beyond the initial application fee and think about how you will use the card and how the provider’s fees affect you. Don’t just make a decision based on the initial cost of the card – think about what you need it for, how you will make top-ups and check that you can examine the account online so you don’t need to pay hefty call centre charges. 

The table below illustrates some of the leading prepaid card deals on the market including all the fees associated with the products:

 

 

* Other currency.
** No fee on orders with a £500 or greater initial load.
Table sourced by moneysupermarket.com on March 17 2008.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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