Are pre-paid cards the way forward?
Once upon a time, pre-paid cards were mainly used by people with no or poor credit histories, as well as people looking for a way to budget.
But over the past few years, these cards have grown in popularity – not least because they offer an alternative way to pay for goods and services while abroad.
Although the number of people using pre-paid cards remains low - research from Which? indicates just 3% of people have a pre-paid card – there are signs that they will be increasingly popular in the months ahead.
For example, Ryanair recently decided to waive its £5 booking fee when passengers pay using a MasterCard pre-paid card. Since 2003, the airline has only offered fee-free bookings on Visa Electron card payments, but from 1 January only passengers using MasterCard pre-paid cards will be able to escape these fees.
What are they?
Pre-paid cards look like credit and debit cards but instead they differ in that they are not linked to a credit limit or a bank account. Instead, pre-paid cards are loaded with currency and then used at cash points or to make payments.
These cards are issued by Visa, MasterCard and Maestro, and come in all currencies with specific cards for euros and US dollars.
They offer you the same ability to purchase products and services but, because you can only spend the money pre-loaded onto the card, there is no risk of running into debt.
Most pre-paid card providers allow you to top up your plastic over the internet or telephone, while some accept texts. Many providers also allow someone else to top a card up for you.
When you apply for a card, you will normally be asked to give a linked current account, and the money is taken directly from there.
Although there may be a minimum and a maximum amount you can put on one of these cards, you can top them up at any time.
If opt for a currency card to use abroad, then loading up a pre-paid card will involve converting sterling into your chosen currency; you will, therefore, be subject to the exchange rate offered by the provider.
Depending on your destination, you can choose to opt for the exchange rate on offer when you load up the card – this means you know exactly how much currency you are getting for your cash and is useful if you expect the exchange rate to become less competitive down the line.
However, other cards apply the exchange rate on offer at the time you use the card.
Paying or withdrawing money using a pre-paid card is similar to using a debit or credit card. You will be issued with a PIN number and your card can be used wherever you see the Visa, MasterCard or Maestro sign (depending on the type of pre-paid card you have).
Unlike credit cards, pre-paid cards are available to anyone regardless of their credit history. All you’ll need is proof of identity and address, so the provider can confirm you are who you say you are.
For many people, one of the key attraction of pre-paid cards is that they allow you to control your spending. Because there is no overdraft facility or credit limit, it is impossible to spend money you don’t have. This is why pre-paid cards are popular with parents, as it gives them a way to budget their children's spending while still giving them the freedom of plastic.
Your pre-paid card provider will send you are breakdown of your monthly spending, so you can see what has been purchased.
Still though, probably the main attraction of pre-paid cards is that they are a great payment option if you travel abroad.
Holidaymakers who rely on plastic abroad will know how easily credit and debit card overseas charges can rack up - research by Caxton FX suggests that as much as £6 in every £90 goes to the bank in hidden charges and fees when a credit or debit card is used to withdraw cash from a cashpoint abroad.
It is possible to avoid these charges using pre-paid cards, as some providers waive overseas charges.
In addition, pre-paid cards are often regarded as more secure than other types of plastic. You could see your current account wiped out or a huge credit card bill racked up if your cards are stolen while abroad - in contrast, if thieves get hold of your pre-paid card, you only risk losing the money on it.
Another benefit of a pre-paid currency card, which is likely to appeal to many people considering the current climate, is the exchange rates they offer. Generally speaking, it is possible to get a better exchange rate on a pre-paid card than by changing cash. This also makes them a good alternative to travellers’ cheques.
The main disadvantage to these cards is that they are not free as charges vary from provider to provider.
The first fee to watch out for is the application fee; this is the charge for opening a pre-paid card account, but may be waived if you load more than a certain amount onto the card upfront. Other providers will charge a monthly charge.
Next, some cards charge a fee when you use them to make a purchase or withdraw money. This can either be a percentage of the amount or a fixed charge. And you could also end up paying when you deposit money onto your card.
These are not the only fees to watch out for. As well as a fee for getting a replacement card, some providers will charge when you top-up the card or renew it, while others have inactivity fees if you don’t use a card loaded with currency for more than 12 consecutive months. There may also be an account termination fee when you close your account.
Finally, calls to the customer helpline can be expensive so look out for cards that also offer online access.
Top pre-paid cards
Finding the best pre-paid card is no easy task, mainly because fees vary from provider to provider. In addition, not all comparison websites offer you the ability to compare different cards - and even those that do, do not display all the information you need on fees and charges.
The best card for you will depend on how you intend to use it. For example, if spending overseas is a top priority for you, then international charges should be your main focus.
If you are looking for a card for your child, then bear in mind that not all pre-paid cards are available to teenagers.
|O2 Load & Go||Free||Free||UK: free
|* Available to O2 customers
* 2.75% international transaction fee
|Everyday spending and teenagers|
|FairFX pre-paid card||£9.95
(on loads under £500)
(UK & abroad)
|*€9/$12 replacement fee
* £10 exit fee
* Free top-up
|* Free top-ups
* £10 replacement fee
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Not to be confused with an early repayment charge (ERC). Exit fees are levied on top of ERCs, which are a method of clawing back lost interest on a loan repaid early. By contrast, exit fees are charged for the administrative work this entails. They are charged as flat fees, from £150 to £300. However, in January 2007, following mortgage lenders surreptitiously raising fees sometimes by fivefold, the Financial Services Authority (FSA) intervened and most mortgage lenders removed exit fees from new mortgages. If you paid exit fees on your mortgage before January 2007, you may be able to claim them back.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.