A Guide to Pre-paid Cards – All You Need to Know

Jonathan Halloway

Written by Jonathan Halloway on September 27, 2018

Updated March 29, 2021

Woman shopping with a prepaid card

In recent years the way we make payments has been revolutionised with more and more people choosing to pay by card rather than with cash than ever before. New technologies such as contactless payments provide a hassle free and super quick way to spend in shops, and mobile technologies have made it easier than ever to make purchases online using just a fingerprint.

There are many different types of bank cards available today, including debit cards, credit cards and pre-paid cards. Pre-paid cards combine the convenience of a debit or credit card with the ability to set a specific spending limit. This guide will cover everything you need to know about pre-paid cards, how they work and why they are an excellent option for sticking to your spending budget.

What are pre-paid cards?

Pre-paid cards work similarly to debit or credit cards, in the sense that you can use them to withdraw cash or make purchases in stores and online. However, pre-paid cards are loaded with your money before you start spending, and there is no borrowing facility like with a credit card.

What if the money runs out?

You can top up your card with money

Once the pre-loaded amount of money runs out, you can no longer use the card until it has been topped up again. This makes them an excellent choice for those looking to tighten their spending and stick to their budget. Pre-paid cards are not linked to a bank account like a debit card, so there is no concern about going into an overdraft as you can only spend as much as you pre-load.

Pre-paid cards will often have a card network logo such as Visa, Mastercard or American Express, which can make them look very much like a credit or debit card. Unlike with a credit card, you are not borrowing any money when using a pre-paid card; you are simply spending the money you have already pre-loaded, so there is no danger of getting yourself into debt or borrowing too much. They provide a plastic alternative to carrying cash around with you and are popular for those who don’t have or want a bank account.

It is impossible to get into debt with a pre-paid card as you can only spend the money that you have already preloaded, once that runs out the card will not work until it has been topped up again.

How do pre-paid cards work?

The money on your card is prepaid in advance

When you first get a pre-paid card, you will decide how much money you want to load onto it, and most cards come with a maximum limit. Once the money is loaded onto the card you can spend it in stores and online, as you would a debit or credit card. When the money runs out, you will no longer be able to spend on the card until it has been topped up again.

How can you top up pre-paid cards?

You can top up pre-paid cards in person in some shops, Post Offices or a Paypoint. Most pre-paid cards can also be topped up online, via an app or over the phone, but this method requires a bank account for the money to be taken from.

Some pre-paid card providers even allow you to top up by SMS or pay your wages directly onto the card. If you do have a bank account, you could set up a standing order or direct debit to load your card regularly.

Can I use them anywhere?

Pre-paid cards are provided by banks and building societies and are either Visa, MasterCard or American Express which means they can be used anywhere that accepts these. Like with a debit or credit card you will have a PIN that must be used when paying with the card or withdrawing cash.

While they work similarly to cash as you cannot overspend, pre-paid cards are generally much safer than using cash as a PIN protects all transactions. If they get lost or stolen, the pre-paid card provider can block it so it cannot be used and issue a replacement.

If you are using your pre-paid card for everyday spending, it is often a good idea not to put too much onto it at any one time. Think of it like having cash in your purse or wallet instead of a bank account.

When can a pre-paid card be used?

There are plenty of times when a pre-paid card could be useful, and while some people choose to use them every day, others use them for certain situations as a one-off. Here are just a few times when a pre-paid card can be a useful option to consider:

Travel and holidays

If you are travelling abroad and concerned about theft or fraud, then a pre-paid travel money card can be a great and secure option. The worst that can happen with a pre-paid card is that you lose the amount loaded onto the card. As you can manage the balance of the card online, via an app or over the phone, there is no need to load your entire holiday budget in one go.

Children and teenagers

If you want your child to learn the value and responsibility of money and debit cards without having access to their own a bank account, a pre-paid card for children can be used as a safer alternative. Many parents will give their children a pre-paid card and load their pocket money onto it to teach them how to manage their money and use a card, without risking them overspending or losing cash.

School trips

Some parents choose to give their children pre-paid cards for school trips, so they can pre-load the amount of money they need for the trip or top it up every day to help manage their spending. This provides a safer and more secure alternative to giving them a large amount of cash for a trip.

Budget management

Many individuals who struggle to manage their budget and wages use pre-paid cards to load their spending money for the month to avoid overspending and using overdrafts or credit facilities.

Pre-paid cards can be used for almost any situation as they can be spent in the same way as a debit or credit card both online and in stores. Some people even use them as an alternative to having a bank account in order to prevent the risk of debt completely.

Types of pre-paid cards

There are a few options available when it comes to pre-paid cards, and when choosing which kind is right for you, it is essential to think about how you plan on using it. There are three key things to consider when deciding which type of pre-paid card is right for you:

  • 1. How you top the card up
  • 2. The currency you want to load onto the card
  • 3. The fees associated with it.

Here are a few of the different types of pre-paid cards available:

Currency & travel money cards

Pre-paid travel cards are a popular choice

Pre-paid travel cards are a popular choice

Most pre-paid cards are designed for spending in the UK and can be loaded with pounds. There is nothing stopping you from using these cards abroad as well, and they will work in the same way as a UK debit or credit card being used abroad. The pre-paid card provider will convert your pounds into the local currency of where you are spending, which often isn’t the cheapest way of converting currency.

You can also get pre-paid cards that are designed specifically for using abroad, and these are often referred to as traveller or global cards. Each of these cards will vary between providers, and the things to look out for are the exchange rates and fees associated with using these cards abroad.

Better exchange rates?

It is possible to get pre-paid cards with exchange rates that are better than many at a bureau de change or high street bank. Using a pre-paid card abroad is safer than bringing cash and will need a PIN so they can’t be used by anyone else if they get lost or stolen. If you do lose a pre-paid card, you can get it blocked immediately by the provider so none of your money will be lost.

Some providers will even offer services such as rushing a replacement card to you with your unspent funds on or sending you emergency cash to help you until your return from your travels.

Top-up cards

Pre-paid cards can be topped up in a variety of ways, and different cards can have different top-up methods. It is important to get a card with a top-up method that works for you and is convenient for you to manage your card balance. Almost all cards can be topped up in person in certain stores, at the Post Office or at a Paypoint.

Some others allow you to load money onto them over the phone, online, by text or by bank transfer from a debit or credit card. It is often better to avoid using a credit card to transfer funds as it will be classed as a cash withdrawal on your credit card which is usually expensive and incurs multiple charges and high-interest rates.

Not all pre-paid cards will have all of these methods available, and specifically for currency cards, it is important to check how they can be loaded. The last thing you want is a currency card that can only be topped up over the phone, resulting in expensive overseas phone calls every time you need to add more travel money while travelling. In most cases, using the internet to load money onto a pre-paid card is the cheapest and most convenient option.

Credit builder cards

Credit builder cards

Pre-paid credit building cards are designed to prevent you from running up massive debts through credit cards and overdrafts. However some pre-paid cards are made specifically for rebuilding your credit history. Many people choose pre-paid cards because they have previously been turned down for credit or debit cards because of a bad credit history, or low credit score.

Credit builder cards can be a great option for these individuals as they can help to restore your credit rating and improve your chances of being approved for other cards in the future.

Credit builder cards often charge a monthly fee, and as long as you pay it on time every month, then your credit score will slowly begin to improve as the fee is regarded as a loan repayment. Some pre-paid cards will even offer a small amount of credit to help to put your score back on track, although this is very rare and not provided by many pre-paid card providers.

Recent new laws have made it a requirement that any unused money on a pre-paid card must be paid back to you. Although some pre-paid card providers might charge you an additional fee to do this.

How much does a pre-paid card cost?

Pre-paid cards come with a vast range of possible fees, so it is vital to understand exactly what you will be charged before applying properly. Most pre-paid cards have an initial charge for setting up the card, and then some also have a monthly fee.

It is possible to find pre-paid cards that do not charge monthly fees, but the features of them may vary. Most cards will charge you for withdrawing cash, or have a limit of how much cash you can withdraw before a fee but the differences between these fees are huge and should be looked at carefully if you plan on using your card for cash withdrawals.

Other pre-paid cards can charge you a small fee every time you pay using the card; this fee could either be a fixed price or a percentage of the amount spent on the card. These fees add up quickly, so it is vital that you consider how you will be using your pre-paid card before you choose one.

Look out for special deals from pre-paid card providers. Many will run promotions that waive the initial set up fees if you load them with a certain amount.

Five good reasons to get a pre-paid card

1. No credit checks are needed to get a pre-paid card. As there is no borrowing facility, there is no need for the card provider to run a credit check before issuing a pre-paid card. This makes them a good option for those with poor credit or young people who have not yet built up a credit rating.

2. No bank account is needed to obtain a pre-paid card, and they can even be used as an alternative to a checking account with a bank or building society. If you don’t want a bank account or struggle to get one, then a pre-paid card gives you the freedom to pay with plastic.

3. Easily control your spending without the temptation of a credit card or overdraft facility. Using a pre-paid card can help to keep you out of debt as you can only spend the money you have already pre-loaded.

4. A throwaway account that can provide an added level of security or privacy to your everyday banking. If you are hesitant to use your debit or credit cards in certain situations, such as an area that is well-known for fraud, then a pre-paid card can be used without compromising the safety of your other accounts.

5. Widely accepted across all major shops and online retailers. As pre-paid cards are associated with big name card networks such as Visa, Mastercard or American Express they are accepted in most places.

It is possible to get more than one pre-paid card linked to the same account so that you can have multiple cards for family members or for business.

Five downsides to pre-paid cards

1. Lots of fees that soon add up make pre-paid cards quite an expensive option. Pre-paid cards are well-known for having high fees and being unclear with their charges, although things have improved a bit in recent years. With proper research, you can often find relatively cheap pre-paid cards for the purpose you want to use them for.

2. They won’t improve your credit unless you get a specific credit builder card. The majority of pre-paid cards will not help you to build your credit score as your activity is not reported to credit agencies.

3. Lack of protection for consumers that use pre-paid cards. Traditional credit and debit cards come with a range of protection benefits that are not available on pre-paid cards. Pre-paid cards are not protected by Section 75 of the Consumer Credit Act.

4. No interest is accrued on money that is put onto a pre-paid card. Sometimes keeping your money in a bank account can be beneficial as you can build interest on it.

5. Borrowing is encouraged by some pre-paid card providers. The idea behind a pre-paid card is that you are not borrowing funds but only spending what you have. However, some providers will encourage you to borrow through overdrafts or credit when your card has run out.

The Financial Services Compensation Scheme does not protect pre-paid cards, so extra care should be taken when choosing a provider to make sure they are trustworthy.

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