On the other hand, if they are used incorrectly, you run the risk of racking up expensive debt and even incurring charges. In some cases then, prepaid cards, which offer much of the same convenience and none of the risk, can be a good alternative. So what are they all about?
What is a prepaid card?
On the face of it, a prepaid card could easily be mistaken for a credit card; it looks just like a credit card, carries a Visa or a MasterCard logo, and can be used to make payments online, via chip and PIN terminals or at the cashpoint. Some prepaid providers even issue cards with contactless payments.
But the big difference between prepaid and credit cards is that, before you can start spending on a prepaid card, you must first load it with cash – usually transferred from your current account. And if there’s no cash on the card, you can’t spend on it – so no chance of racking up debt. In addition, most prepaid cards will have a cap on the amount you can load onto them.
The downside of prepaid cards is that they often come with either one or more of the following fees:
-One-off application fee
-Usage (or purchase) fee
-Dormancy fee (for inactivity)
You can eradicate many of these fees by shopping around for the best deal and loading a required minimum amount on the card. However, in some cases, if you are confident of being able to get a credit card, or have a bank account with a debit card facility, then prepaid cards could be a more costly option.
Other potential pitfalls include the fact that purchases made on a prepaid cards are not, in most cases, protected by the Consumer Credit Act. And if the bank or building society providing the prepaid card goes bust, any outstanding cash stored on the card is not protected as part of the Financial Services Compensation Scheme (FSCS) either.
But prepaid cards can be the best option. Here’s five reasons a prepaid card could suit you.
1. You are going abroad
You can choose to load a prepaid card in dollars, euros or sterling – though other currencies are becoming available. And, so long as you are visiting a country of that currency, you will not incur any foreign exchange fees (also known as loading, foreign purchase or conversion fee) for any transactions made on your card.
But if you use a prepaid card loaded with the wrong currency, you will be charged a fee for each transaction. For example, the FairFX Anywhere card charges an ‘out of currency fee’ of 1.4% per overseas transaction.
Credit cards typically charge foreign exchange fees, though you can avoid them if you shop around, as Jessica Bown explains in her article, The best credit cards to take on holiday this year.
Another advantage of travelling with a prepaid card is that you can load it up with travel money when the exchange rate is good – and therefore won’t lose out if the exchange rate worsens when you’re away on holiday.
Prepaid cards typically charge ATM fees however (either as a percentage of the sum withdrawn or as a flat fee) so if you do plan on withdrawing cash abroad, make sure you know what these are first.
Another card that may suit travellers is the my Travel Cash Multi-Currency prepaid card, which not only offers free purchases abroad but also does away with ATM fees when you withdraw cash.
2. You (or your child) is under 18
Credit cards aren’t available to anyone aged under 18, and although some children’s bank accounts come with a debit card facility, a prepaid card may be a better option if you’re looking to help your kids with their money management, as you can control the amount they have to spend – consider it a modern day way to give out pocket money.
This will also give your kids the freedom to make purchases online and a prepaid card could be linked to and iTunes or Android account to avoid any bills getting run up at your expense. For more on this read my article, Do parents need greater protection online?
If you take out a Virgin Prepaid Card then you can add up to five additional cardholders (at a cost of £4.95 per card) provided that they are over 13 years old and be registered at the same address as the main cardholder. This card has an application fee of £9.95 and a monthly fee of £4.75.
3. You want to stick to a spending budget
When preparing a household budget, one tip is always to take out cash instead of spending on your debit card, the theory being that it’s much easier to fritter away your wages when you put everything on plastic. But paying with cash isn’t always convenient. So instead you could take out a prepaid card, load it with enough cash to cover your monthly spending money.
4. Your credit rating is low
If you have a low credit rating then you won’t qualify for the majority of credit cards. What's more, the more times you are turned down, the more your credit score will drop.
However, when applying for a prepaid card, your credit history is not searched so is therefore irrelevant – after all you are not borrowing. But despite this fact, some prepaid cards can still actually still help you build up your credit score.
The CashPlus Gold Activeplus prepaid card for example, offers a free Creditbuilder service that you can add at no extra cost. This works by the card provider effectively ‘lending’ you a full year’s worth of monthly card fees in advance. You won’t pay interest on the loan but will be required to pay it back over the course of the year. Details of your payment reliability will be passed to credit reference agencies and – providing it’s good – will help boost your credit score. So it’s great for those who want to start building a credit profile or improve their current one.
The CashPlus Gold Activeplus prepaid card is free to load, comes with purchase protection and even offers cashback rewards on purchases and direct debit services. On the downside, the card does come with a £4.95 application fee and, while it is free to use for the first three months, you'll have to pay a monthly fee of £4.95 thereafter.
The ClearCash Prepaid MasterCard Monthly also offers a Creditbuilder facility.
5. You don’t have a bank account
It’s estimated that there are almost a million people in the UK who don’t have a bank account and the latest Credit Action debt statistics reveal that 277 people are declared insolvent or bankrupt every day, a situation which can make it very difficult to open even a basic bank account.
In this case, a prepaid card could offer a good alternative as there are some that allow you to set up monthly direct debits and even make monthly mortgage repayments as part of the service.
For instance, the ClearCash Prepaid MasterCard Monthly gives you an individual account number and sort code which allows up to 20 payments, transfers and standing orders per month and also means that you can have your wages paid directly into your ClearCash account. On the downside, there is a £4.95 application fee and a monthly fee of £9.95.
The Cashplus prepaid card also allows for wages to be paid directly into your cashplus account and offers direct debit and bill payment facilities.
Our May Money Sale!
And don’t miss out on the special offers on prepaid cards in MoneySupermarket’s May Money Sale.
Take out the previously-mentioned my Travel Cash Prepaid MasterCard Multi Currency Card, load it with £750 and get £10 free - or get the same deal in the equivalent currency on the provider's euro and dollar cards.
Alternatively, take out a FairFX Prepaid Euro MasterCard and get £10 extra free when you load £500 or more.
For more offers from the MoneySupermarket May Money Sale, click here.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct. We’re free, independent and compare all UK credit cards, as well as offering exclusive deals you can’t get anywhere else. Contact MoneySupermarket.com at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2013.