Prepaid Cards: What are they and how do you use them?
Prepaid cards are an alternative to using cash, and don’t require you to open a bank account. Our guide explains how prepaid cards work, from topping them up to travelling abroad.
Key takeaways
Prepaid cards offer a convenient and flexible way to manage your finances
You can top up your card using various methods (online, bank transfers, cash deposits, employer payments)
Prepaid cards are not covered by the FSCS (Financial Services Compensation Scheme)
What is a prepaid card?
Prepaid cards, also known as everyday cards, function as a middle ground between cash and bank cards. Unlike a debit or credit card, you top them up when you need to – which can help with budgeting. You load funds onto the card, and as you make purchases or withdraw cash, the balance decreases. It's a simple concept: spend only what you have. You can have as many prepaid cards as you like in your wallet, and they come with different balance limits. The way you top up can affect that limit.
How prepaid cards work
These cards are straightforward to use:
Load money: Add funds to your card at the time of purchase and top it up as necessary.
Spend wisely: Use the card for transactions up to the amount you've loaded.
Top up: Replenish the card's balance through various methods, including online transfers and cash deposits.
Prepaid cards are a boon for those who want to avoid debt as they cannot incur overdrafts and do not require a credit check. This makes them accessible to a wider audience, regardless of their credit history.
Topping up your card
Adding funds to your prepaid card is versatile:
Online: Using a credit or debit card to top up via the card provider’s website or app.
Bank transfers: Sending a bank transfer to the prepaid card using the sort code, account number, and reference provided by the prepaid card provider.
Cash deposits: Pay cash at designated locations to add to your balance.
Employer payments: Some cards allow direct deposits from your employer.
Paying in money: Paying in cash at banks, post offices, or locations offering a PayPoint service.
Someone else: The option for others, such as employers, to top up your prepaid card.
Remember, while you can withdraw cash at ATMs, fees may apply depending on the card provider.
The safety of prepaid cards
When it comes to security, prepaid cards offer peace of mind. They are regulated by the Financial Conduct Authority (FCA), ensuring fair play, and providers must trade as an authorized ‘E-Money’ institution. However, it's worth noting that funds loaded onto prepaid cards are not covered by the Financial Services Compensation Scheme (FSCS). To mitigate risk, it's advisable to load only the necessary funds for immediate expenses.
Prepaid cards for travel
When it comes to travelling abroad, prepaid travel cards (also known as prepaid currency cards) can be a way to keep your money safe while you’re on holiday. If your wallet is lost or stolen, you can contact your card company to have the card blocked so it can’t be used. These cards are preloaded with the currency of your choice, such as euros, US dollars or pounds, locking in the exchange rate and helping you budget for your trip. They are also useful for children on holiday to teach them how to manage their money.
Advantages and disadvantages of prepaid cards
Prepaid cards come with a host of benefits:
Budgeting: They are excellent tools for managing spending by topping up the card as needed.
No credit checks: Unlike a credit card, you can’t run into debt with a prepaid card and won’t be credit checked when you apply.
Travel-friendly: Prepaid travel cards are perfect for secure spending abroad and the ability to block the card if it's stolen.
However, there are some downsides to consider:
No Section 75 protection: If you use a credit card to buy something over £100, you’re covered if there’s a problem - this isn’t the case with prepaid cards.
Fees: Some cards come with charges for issuance, monthly maintenance, and transactions. There may be a fee when you withdraw money from an ATM, and charges for using the card to pay for goods, with a possible small fee each time you spend.
Credit-Builder prepaid cards
While prepaid cards are essentially meant to avoid letting you run up debt, there are a few which are designed to rebuild your credit history. These cards may charge a monthly fee, but regular, timely payments can contribute positively to your credit score. It's crucial to adhere to the terms and conditions to ensure your credit is being built, not damaged.
Making the right choice
With so many types of prepaid card and providers out there, choosing the right card for you can feel overwhelming. But that’s where MoneySuperMarket comes in. Our service helps you compare various prepaid cards and deals from UK providers, tailoring the search to your specific needs without any additional cost to you. MoneySuperMarket is a credit broker and is usually paid a fee by lenders, which does not affect how products are shown to customers.
