How Do Prepaid Cards Work?

Prepaid Cards Best Buys Prepaid Cards FAQ's Have a question? Send in your question and we'll do all we can to help answer it. Where appropriate user questions will be added to the FAQ's for future use.

Prepaid credit & debit cards work in exactly the same way as conventional cards, they work with Chip and Pin and are accepted on the high street, online, over the telephone and even overseas - wherever you see the MasterCard / Visa / Maestro symbols.

The big difference over a conventional card is that a prepaid card is not a credit facility. The money you spend on the card is your own, loaded on to the card in advance by you via bank transfer, with a debit or credit card or at a post office or participating retailer.

They're already here...

Many people are already very familiar with prepaid phone cards or gift cards. Prepaid credit cards work in the same way. However, unlike a gift card that you may receive for Christmas or Birthday, your prepaid credit card will have no cash balance on it when you first receive it. This gives you the opportunity to manage how much you put on your card yourself, subject to certain limits.

Flexibility

Prepaid cards come branded as MasterCard, Maestro or Visa payment systems. The ones that have the widest acceptance are MasterCard and Visa. They are accepted worldwide, and so are particularly good for holiday travel.

Prepaid cards can be topped up remotely from your bank account using online or telephone banking. Alternatively you can manage your card online and top it with a debit or credit card. Some cards can also be topped up using cash at Post Offices and at participating retailers offering payment networks like PayPoint and e-pay.

This makes it easy to set money aside for particular uses e.g. going on holiday or spending at the sales. By limiting yourself to a certain amount beforehand, you can’t give in to the temptation to splurge more than you can afford.

If you're going to use a prepaid credit card for setting money aside for a particular use then think of it as a savings account - every week or month, load a little on to the card. By the time the January sales come around, you'll probably have more than you thought set aside.

Two flavours of card

There are two basic types of prepaid credit card – Pay monthly and Pay As You Go.

For the first type, you'll pay a monthly fee for using the card. This will typically be around the £4.99 mark. You won't be charged a fee on purchases that you make - apart from those made abroad which will fall under the Foreign Transaction Fee.

The other basic flavour is Pay As You Go. For these prepaid cards, it's the other way around - you don't pay a monthly fee, but you will pay a fee for every purchase that you make within the UK. This fee is typically around 2.95%. If you use your card abroad, the purchase fee could be even higher, at around 3.5%.

How do I get one?

Because prepaid cards are not a form of borrowing, there are no credit checks. So even if you have a poor or non-existent credit history, there will be no problems in getting hold of one. Most are via a simple on line application. Some cards also have promotions via other media - for example, through the tabloid papers.

Some cards have minimal age restrictions, and are available to children as young as 13 years, though often as an additional card or when taken out by someone aged over 18 or over such as a parent or guardian. Prepaid cards can be seen as a way to teach youngsters how to manage their money effectively and it's safer than carrying cash. And there is also a very good case for teenagers to have a secondary card on an adult's account just in case of emergencies.

Absolutely no interest

With a prepaid credit card, you're spending your own money. The card issuer can't charge you any interest because you're not borrowing any money.

So how does the card issuer make any kind of a profit on the deal? Well, they're not issuing cards out of the kindness of their hearts - this is a selection of some of the fees to look out for:

• Initial application fee - ranges from £5.00 to £10.00
• Monthly fee - charged every month and debited from any outstanding balance. Ranges from zero to £5.95
• Reload fee - a charge for putting more cash on the card. Typically 1.95% but can be as high as 3%, or as low as zero. Tends to vary between top-up method as well as card provider
• ATM Fee - the charge for withdrawing cash via an ATM
• Foreign Transaction Fee - a percentage of each transaction abroad, typically 2.75%. Cards designed specifically for use abroad e.g. a Euro or Dollar based Post Office Travel Card does not have this charge when spending in Euros or Dollars.

Summary

Prepaid cards are great news if you are on a tight budget, or haven't got a bank account. The following section gives a fuller list of those who this type of card may suit. Prepaid credit cards are accepted in virtually all places that regular credit and debit cards are taken.

Used correctly, they are a good way to control your finances, but remember - charges, charges, charges. Make sure you check out what you'll be paying before you take one on.

The next section of the guide gives advice on how to compare the different prepaid cards on the market.

Compare prepaid cards