Control your Christmas spending with a pre-paid card
Christmas time: 'tis the season of goodwill and merrymaking, and as a result many of us find ourselves splashing out far more than we intended. All too frequently our post-Christmas account balances and credit card statements leave us asking ourselves why we didn't make more of an effort to keep our finances in check.
Pre-paid cards are one way of keeping an eye on expenditure, and the currency version is an attractive option for exchanging holiday money over the festive season. But the market, though "fast-growing", according to Kevin Harrington, managing director of industry regulator Global Prepaid Exchange, is still in its infancy.
General use pre-paid cards were introduced to the UK in 2005 (though pre-paid store gift cards were available in 2002). Last year, pre-paid cards were used 26.9 million times for purchases, compared with debit cards, which were used 6.4 billion times. That difference reflects the fact that many of us are still not very clued up on them. In fact, there's quite a lot you need to consider.
WHAT IS A PRE-PAID CARD?
Pre-paid cards work in the same way as a pay as you go mobile phone tariff - you determine how much money you top up your account with.
Unlike debit cards, which give the cardholder access to the entire balance of their bank account and an overdraft facility, or credit cards, which allow cardholders to spend up to the agreed credit limit, pre-paid cards only allow you to spend what has been loaded onto the card. They can be a handy way to curb spending.
HOW DO I GET ONE?
There's no requirement for credit rating checks. Simply go to your chosen provider's website and fill in your contact details.
If you're picking a pre-paid card for overseas use, you'll have to specify which currency you want - euros or US dollars - or whether you want a global card, which offers both.
The application process varies slightly with each provider - you may receive an email confirmation with further login codes to use online, or simply receive the card after a few days, along with a PIN and another code to activate your card online. Whichever provider you decide on, all their application processes are pretty straightforward and intuitive.
For help with deciding on which card to go for, use comparison sites such as compareprepaid.co.uk and moneysupermarket.com.
Best buy sterling prepaid cards (minimum load £10)
|Pre-paid card||Application fee||ATM fee||Retail transaction fee||Inactivity fee (monthly)||Other reload fee*|
|Cashplus Gold Active Plus||£3.95||Free for three months, up to £2 thereafter||Free||Up to £4.95 if account is inactive for 120 days||N/A|
|Kalixa||£4.95||£1.75||Free||99p if no funds have been debited from the account for six months||1.75% using a debit/credit card|
|Orange Cash||£5||2.95%||Free||N/A||£1.50 at Post Office and elsewhere|
|360 money's Splash Plastic||£5||£1.50||2.5%||N/A||30p per £10 at Post Office|
|ClearCash Pay-as-you-go||£4.50||75p||2.5%||N/A||3% at PayPoint|
* All cards have at least one free reload option. Source:Moneysupermarket.com
HOW DO I LOAD MY CARD?
The easiest way is online, but depending on the card provider, you may also be able to top up your balance over the counter at the Post Office, by text or over the phone. You can then use your card to withdraw money or to pay directly.
The cost of loading will depend on the method: for example, with Kalixa cards it's free to load money via internet banking, but you'll pay a 1.75% fee to load your card at kalixa.com with a credit or debit card.
Also check what the maximum weekly and monthly loads are too - these may alter slightly depending on loading method, but the Orange cash card, for instance, allows a £5,000 maximum and £10 minimum balance in Orange stores and at the Post Office, or £20 by credit card. Its maximum one-off load is £500.
ARE THERE OTHER COSTS TO LOOK OUT FOR?
Some providers will charge you for using ATMs, but the majority won't charge for paying directly with your card. Most pre-paid cards include an initial application fee of around £5. Some also charge monthly fees, usually on the basis that they offer superior services.
For example, the Cashplus Gold Activeplus account charges £4.95 and promises to help build up cardholders' credit ratings.
Also watch out for inactivity fees. Not all providers charge these, and the point at which they kick in varies by provider. For instance, the Cashplus Gold Active Plus card charges up to £4.95 per month if the card is inactive for 120 days but Kalixa charges 99p per month if funds haven't been debited from the account for six months.
ARE THEY SECURE?
If your card is lost or stolen, your bank details are safe. "Provided you've been responsible with your PIN details, you will be able to claim back the money from your card provider," says Doriena Koldenhof, spokesperson for the UK Cards Association.
Until recently, the main disadvantage of using pre-paid cards was that they weren't covered by the Financial Services Compensation Scheme. However, from 30 April 2011, the Electronic Money Directive introduced new regulations that safeguard customers' money in the same way. Providers are also no longer allowed to impose time limits on how quickly customers redeem their money.
WHY DO PEOPLE USE THEM FOR TRAVEL MONEY?
In addition to general use pre-paid cards, there are also foreign currency equivalents available that convert your cash into euros or US dollars. These cards have higher minimum loads: FairFX requires at least £50, CaxtonFX £100 and Ryanair's pre-paid card £150.
They are popular with travellers for three main reasons: they are convenient, secure and they offer competitive exchange rates. It would cost £903 to convert €1,000 at Thomas Cook against £874.28 with CaxtonFX's pre-paid Europe Traveller card.
Because you peg the exchange rate when you purchase your currency, you can also buy when the exchange rate looks favourable.
Ryanair has launched its own pre-paid card, and its customers pay no card charges when using it to pay for flights online.
A debit card that works in the same way as a pay-as-you-go mobile: you top it up with cash and then use it just as you would a normal debit/credit card. Although some are badged Visa and MasterCard, pre-paid cards are not a credit card; you can only spend what you load. Prepaid cards are aimed at people who might not traditionally hold bank accounts – children, teenagers, people with poor credit ratings, migrant workers, and benefit claimants – and there are no credit checks on the applicant.
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.
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.
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.
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.