Prepaid cards: the pros and cons
Once the balance reaches zero, the card can be topped up again. Unlike credit or debit cards, it is impossible to spend more than your balance on a prepaid card – they are not equipped with a credit, overdraft or borrowing facility.
Prepaid cards are a relatively new innovation, but are becoming increasingly widespread. Research by MasterCard suggests there are around 500 million in circulation across Europe alone.
In this guide, YourMoney.com assesses the pros and cons of prepaid cards.
- Prepaid cards can be topped up via ATMs, the web, text messages or phone, making them a potentially attractive option for those on the move who don’t want to carry large sums of cash or risk the prospect of losing their debit or credit card.
- Prepaid cards are issued via the Visa and MasterCard networks, meaning they are commonly accepted nationally and abroad. Carrying a prepaid card overseas is safer than carrying cash, and the money held on it is replaced if the card is lost or stolen.
- Prepaid cards don’t charge foreign-exchange fees for purchases made abroad (provided the currency held on the card matches the local currency), unlike credit and debit cards.
- Cash conscious consumers can use the cards as a budgeting aid, storing select amounts for day-to-day expenses; parents can load pocket money onto the cards for their children, more preferable to some than handing over cash.
- Prepaid cards can be used to pay bills and fees, and purchase products online, safe from fraudsters – if the card’s details fall into the wrong hands, credit cannot be run up at your expense.
- Some prepaid card providers specifically cater to travellers, allowing users to ‘lock in’ exchange rates at the time of purchase. For those who wish to capitalise on particularly favourable rates at a specific point in time, this can reduce a holiday’s foreign currency bill.
- Prepaid card providers don’t carry out credit checks on applicants, so are a good option for consumers with poor credit ratings. Some prepaid cards even offer credit building services, helping consumers improve their credit scores. These cards charge users a monthly fee, and after an allotted period this figure will appear as a completed loan on their credit report.
- There are several charges associated with prepaid cards. According to research issued by Which?, of the roughly 35 prepaid cards currently available to consumers, almost every one charges users at least one of the following;
– Application fees
– Monthly fees
– Top-up fees
– Transaction fees
– ATM withdrawal fees
Some prepaid cards even charge inactivity fees, if a user doesn’t use the card for over a year.
The table below outlines the charges associated with the top five prepaid card issuers:
- Prepaid cards are not covered by Section 75 of the Consumer Credit Act. This means users have no protection if something goes awry when they purchase goods or services – if they buy something they do not receive using their prepaid card, the money is simply lost.
- Money stored on prepaid cards does not accrue interest.