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Credit card Guides
What are prepaid credit cards?
Updated: Thursday 1 December, 2011
By Martin Fagan
This guide explores the pros and cons of prepaid cards to help you understand how they work and whether or not they might suit you.
For those that require the functionality of a credit card, but without wishing to borrow money and rack up huge debts, a prepaid credit card could be the ideal solution.
Read our prepaid credit card overview to see if this type of card could work for you.
- What are prepaid credit cards?
- Are fees and charges involved?
- Who are they for?
- What are the advantages?
- What are the disadvantages?
- And finally…
What are Prepaid Credit Cards?
Similar in principle to a pay-as-you-go mobile phone tariff, a prepaid credit card allows you load your card with cash and spend until the card runs out of money and needs to be topped up. Cards can be topped up by bank transfer, direct debit and through many retail outlets.
Prepaid credit cards currently on the market include the Post Office Travel Money Card, O2 Cash Manager and Virgin’s Prepaid Mastercard.
Are fees and charges involved?
The simple answer is “yes”. Here’s a rundown of the charges associated with prepaid credit cards. Not all cards will levy every fee and some will levy more types of fees than others. Remember to check the small print before signing up:
- Application fee - Quite often you will be charged for taking out a prepaid credit card
- Monthly service charge - By paying this fee you’re usually entitled to services such as online account access and a dedicated customer support
- Card loading fee - You may be charged each time you elect to top-up your card with cash
- ATM withdrawal fee - As with most credit cards, prepaid credit cards are subject to cash withdrawal (or “cash advance”) fees. Check the small print though - some cash machines will let you withdraw cash and make deposits for free
- Purchase or “online” fee - You may be charged for specific transactions, i.e. online purchases
- Overseas fees - Some cards charge extra if you use them abroad
- Replacement card fees - Some issuers charge you if you lose your card and need a replacement>/li>
Fees vary between prepaid cards. Virgin Money’s Pay Monthly card, for example, costs £9.95 to set up (and £4.95 for an extra card or to replace lost cards) and then £4.75 a month. The card is free to use in the UK but there is a £1.50 fee for cash withdrawals. If you use the card overseas you’ll be charged 2.95% of the transaction amount and £1.50 every time you use a non-UK ATM. Topping up the card at a post office, by debit card or direct transfer is free but you’ll be charged 2.75% of the transaction amount if you top up by retail payment network PayPoint and 2.5% if you top up by credit card.
Virgin offers a pay-as-you-go option which doesn’t charge the monthly fee but, rather than fee-free transactions, every time you use the card in a shop it will cost you 2.95% of each transaction’s value. Also, rather than a flat fee for cash withdrawals, the pay-as-you-go option charges a percentage which is cheaper if you only withdraw infrequent small amounts, but if you withdraw big sums the flat £1.50 fee of the monthly card will be the more cost-effective option.
For example - and this holds for many prepaid cards - withdrawing £20 cash in the UK will cost a pay-as-you-go cardholder 59p and a monthly cardholder the £1.50 flat fee. However, if the withdrawal is £200, the pay-as-you-go cardholder gets stung for £5.90, while the monthly cardholder still only pays the £1.50 flat fee.
Who are they for?
Prepaid credit cards are designed for those who are unable to obtain a standard credit card. Maybe you’re too young to apply for a credit card, or perhaps you’ve had an application turned down due to a poor credit history? In these instances, a prepaid credit card could be the solution.
Additionally, you’re not permitted to spend beyond the amount that has been loaded onto the card, so with a prepaid credit card it’s impossible to get into debt.
What are the advantages?
Some prepaid credit cards offer free protection when making online purchases; however, there is no protection for losses under Section 75 of the Consumer Credit Act, which applies to foreign transactions and also if you buy goods for delivery to the UK from overseas by telephone, mail order or over the internet.
Using a prepaid credit card can also help you add discipline to your budget, especially if money runs through your hands like water. You can’t spend more than has been loaded onto the card.
Carrying a prepaid credit card is safer than carrying huge amounts of cash - if the card is lost then it can be instantly blocked.
Unlike standard credit cards, there’s no interest to pay on prepaid credit cards. You can make purchases without having to worry about extra interest payments on top.
What are the disadvantages?
Firstly, there is often a fee charged when loading money onto prepaid credit cards, and if you don’t load them strategically then you might end up spending as much as you would in interest on a standard credit card.
Secondly, money sitting dormant on a prepaid credit card is not attracting any interest. The equivalent amount parked in a savings account would be earning interest and working for you. In addition, some prepaid card providers will also impose a charge if you don’t use the prepaid card for a set period, usually 12 months.
And finally…
Prepaid credit cards are ideal for those who require the functionality of a credit card, but have been refused a standard credit card due to a poor credit rating. They’re also a handy spending tool for those who are conscious of avoiding debt.
Compare credit cards with Creditchoices.co.uk to find the right card for yourself.