Prepaid cards: what are they and how do you use them?

Key takeaways

• You load money onto a prepaid card before spending and it can help you stick to a budget

• Top-up methods, fees and card limits vary between providers

• Prepaid cards aren’t covered by the Financial Services Compensation Scheme but providers must safeguard customer funds

What is a prepaid card?

Prepaid cards, sometimes called everyday spending cards, work like a pay-as-you-go option for your money.

Unlike a debit or credit card, a prepaid card isn’t linked directly to a current account. Instead, you load money onto the card and use it for purchases or ATM withdrawals until the balance runs out.

Because you aren’t borrowing money, there’s usually no credit check. Providers will still need to verify your identity with a passport or driving licence and may have age, residency and other eligibility requirements.

Prepaid cards can be useful for budgeting, travel or giving someone else a set amount of money to spend. However, fees and limits vary, so compare the overall cost before choosing one.

How do prepaid cards work?

Prepaid cards vary depending on the provider and the card but most work in the following way:

• Apply and activate: Compare your options, Cchoose a card, complete any identity checks and activate it when it arrives

• Load money: Add funds using one of the top-up methods supported by the provider, usually a bank transfer

• Spend: Use the card in shops, online, or at ATMs, subject to the available balance and any card limits on withdrawals

• Track your balance: Check your spending and add more money through the provider’s app, website or another supported method

Most prepaid cards don’t offer an overdraft, so a payment will usually be declined if there isn’t enough money available. This can help you control your spending, but it’s worth keeping a backup way to pay, such as a debit or credit card or cash.

How do I top up a prepaid card?

Depending on the provider, you may be able to add money:

• Through the provider’s website or app

• By bank transfer

• By debit card

• With cash at participating Post Office branches, PayPoint locations or other retailers

• Through payments from an employer or benefits provider

• By transfer from another person, such as a family member

What are the pros and cons of prepaid cards

It’s good to understand the advantages and disadvantages of using prepaid cards before you take one out.

Choosing the right prepaid card

The right prepaid card depends on whether you plan to use it for everyday spending, when travelling abroad, or for helping a child or family member manage their money.

Always compare the following:

• Card-issue and monthly fees

• Charges for loading, spending and withdrawing cash

• Inactivity and replacement-card fees

• Spending, balance, withdrawal and top-up limits

• Supported currencies and overseas charges

• Top-up options

• App features and card controls

• Where the card is accepted

• How the provider safeguards your money

• What extra benefits are included

MoneySuperMarket can help you compare prepaid cards and find one that suits how you expect to use it.

Are prepaid cards safe?

Money loaded onto a prepaid card is usually classed as electronic money. Providers must follow the relevant Financial Conduct Authority (FCA) rules and safeguard customer funds by keeping them separate from their own operating money.

However, prepaid-card balances aren’t protected by the Financial Services Compensation Scheme (FSCS). If a provider fails, recovering your money may take longer than it would with an FSCS-protected bank account.

Avoid using a prepaid card for long-term savings or holding more money than you need for immediate spending. If the card is lost or you notice an unfamiliar transaction, contact the provider immediately so it can be blocked.

Do prepaid cards work abroad?

Some prepaid travel cards are designed specifically for overseas spending.

Depending on the card, you may be able to load euros, US dollars, pounds or several currencies at a time. Some cards lock in an exchange rate when you load them, while others convert your money when you spend.

Check the exchange-rate markup, foreign transaction fees and ATM withdrawal charges. It’s also sensible to take a backup way to pay, as prepaid cards may not be accepted for hotel deposits, car hire or some petrol-station payments.

Cards designed for children and young people can also be useful for managing spending while travelling, although age limits and parental controls vary.

Can a prepaid card improve my credit score?

Using an ordinary prepaid card won’t improve your credit score. You aren’t borrowing money, and your spending and top-ups aren’t normally reported to credit reference agencies.

Some providers offer a separate credit-building feature with a paid current account. This may turn a year’s account fees into a payment plan and report your repayments to credit reference agencies.

Paying on time could help build your credit history, but an improvement isn’t guaranteed. Missing payments could damage your credit record.

Can I get a prepaid card with bad credit?

Usually, yes. As you’re spending your own money rather than borrowing, providers generally don’t carry out a credit check.

You’ll still need to pass identity checks and meet the provider’s eligibility requirements. Compare the fees and limits carefully, as a fee-free basic bank account may be a better option for some people.