When prepaid cards beat credit cards

Prepaid cards seem to be everywhere at the moment. We show you what they're all about.

The popularity of prepaid cards is currently soaring, with many people turning to them instead of more traditional credit and debit cards.

Here, we’re going to explain exactly what prepaid cards are, highlight their pros and cons, and help you work out which one might be right for you.

What are prepaid cards?

Prepaid cards can be used in much the same way as credit or debit cards. The main difference (as the name suggests) is that you need to pre-load the card with money before you can use it.

Once you’ve spent the balance on the card, it won’t let you spend any more, so you won’t be able to get into debt as you would with a credit card (or a debit card with an overdraft facility).

Money can typically be loaded on to the card in a number of different ways; for example at a bank, via bank transfer or at Payzone or Paypoint outlets. Each card offers a slightly different range of loading options.

Most prepaid cards are accepted in the same places that accept Maestro, so you’ll normally have a wide range of retailers open to you.

What are the advantages of prepaid cards?

It’s impossible to get into debt using a prepaid card, which is a big plus if your money management skills aren’t perfect. And they have other advantages, too:

Your credit rating doesn’t matter: Getting one doesn’t depend on your credit record; so you should be able to get one even if you’ve been rejected for a credit card.

Other people: A prepaid card can be a good way of providing other members of the family - like your children - with a controlled method of spending. Unlike credit cards, most prepaid cards are available to children over 13.

That means, for example, that you can give teenagers their allowance on them, and use the cards to teach them how to handle money.

Overseas: A prepaid card can be a good piece of plastic to have when you’re travelling overseas. Certain debit and credit cards can beat them for value abroad, but they’re much cheaper to use than some others.

It’s particularly important that you hunt down the right prepaid card for overseas use: Several will hit you with heavy loading fees and other extra charges when you’re abroad.

Online: If you can’t get a credit or debit card, you might be missing out on bargains only available on the web. A prepaid card could help solve this problem, as most websites will accept them as a means of payment.

And what are the disadvantages?

The main disadvantage associated with prepaid cards is the different fees involved. Here’s how the charges typically break down:

Loading fees: You’ll sometimes be charged every time you add funds to your card. Some cards charge a flat fee (usually 75p - £1) whilst others charge a percentage of the amount you’ve added - usually around 3%. The fee you’re charged may depend on the method you use to top up the card.

Transaction fees: Some prepaid cards will charge you every time you use them to buy things. Some will charge a flat fee per transaction, whilst others will charge a percentage of the amount you’ve spent.

All prepaid cards will charge you for withdrawing cash from ATMs. Because of this, it’s better to avoid using prepaid cards for cash withdrawal altogether (just use a debit card for this). 

Recent question on this topic

• RogerinSpain47 asks:

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Application fees: Although certain prepaid cards are free to take out, some will charge you up to £10. Even if a card doesn’t charge an upfront application fee, watch out for replacement fees.

This is important, because some cards ‘expire’ after a set period of time (for example, 12 months). You may then have to pay a replacement fee if you want to spend any funds still on the card.

Inactivity fee: Some prepaid card providers charge this fee if the card isn’t used for a certain period of time; as always, it’s worth checking the small print.

Monthly charges: Finally, be wary of any prepaid cards that charge a monthly fee just for holding them. Occasionally the other services they offer (for example, free set-up and loading) will offset these costs; but usually they don’t work out to be very good value.

The verdict

Many people will find that overall, a good credit card or debit card is better value when it comes to spending in the UK.

For example, a cashback credit card will allow you to earn money back every time you use it. And there are normally no fees associated with using a debit card, providing you stay within your overdraft limit.

However, there are certain circumstances in which prepaid cards come into their own. For example, if you want to provide teenage son or daughter with some spending money overseas, a prepaid card could be the perfect solution.

Which prepaid cards do we like most?

Here's a quick rundown of some of my favourite prepaid cards:

Best for managing your money in the UK:  The best-buy is probably the O2 Cash Manager which has no set-up fees, monthly fees or reloading fees. This is a good choice for people wanting to spend in the UK, and for online purchases. But the downside is that it's only available to O2 customers.

For a card that's available more widely, the next best choice is Kalixa. You'll be charged £4.95 to buy the card but there won't be any charges for UK transactions. However, be careful not to use it to withdraw cash from the ATM as this will cost £1.75 each time.

Spending overseas: I like the FairFX prepaid card. There are no spending or foreign loading fees, plus your balance can be topped up for free by bank transfer or debit card. Better still, if you put at least £500 on the card, you'll get a free £5 bonus.

Good for teenagers: The Extreme Cred card is a good choice for teenagers. You'll have to pay an £8.95 application fee, plus a £1 monthly fee, and be charged to top up the card (70p at Post Office or 3% online). But there are no fees for spending on this card, so if you just put one big payment onto the card and give it to your child/someone else (who doesn't need to top it up), it works out to be good value.

Compare different types of cards at the lovemoney.com credit card centre

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