Prepaid Cards

What are prepaid cards?

Prepaid cards do exactly what they say on the tin. You load cash onto a card, which can then be used in shops and restaurants just like a debit or credit card. However, that's pretty much where the similarities end. First, there's the crucial point:

If you haven't loaded money on it, you can't spend on it.

Think of them like pay-as-you-go mobile phones. You can't spend beyond £0, forming a 'safe' barrier if you tend to overspend.

Another bonus is that you won't get credit-checked when you apply, making the application process much simpler. They're a good option for those who have just moved to the UK, or have a bad credit history.

Some people worry they may not be able to use a prepaid card in a lot of places. But most prepaid cards are Mastercard or Visa, meaning just like credit or debit cards, they're accepted by most retailers in the UK and abroad.

Who are they for?

• Those who dip into their overdraft – great for everyday spending

  If you struggle with budgeting, then a prepaid card may work out cheaper instead of accidentally dipping into a pricey overdraft on a regular basis.

  You'd spend as you normally would using a debit or credit card, but you don't have to worry about missing out on perks – some cards also offer cashback and discounts on well-known retailers.

• Teenagers

  Most children's bank accounts come with a debit card, but the worry is that they can spend all of the money in the account. With prepaid cards, parents can set maximum limits and keep an eye on their spending.

  It might also be useful for school trips. If your child loses cash on a school trip, it can't be recovered. But if he or she loses a prepaid card, you can block the card by reporting its loss straight away.

  For a more extensive analysis of prepaid cards and bank accounts aimed at under-18s, see our new guide: Top cards for under-18s.

• Bad credit

  If you've got bad credit and have previously defaulted on loans, or have county court judgments (CCJs), your credit file won't be in good shape. If your default is recent or if you haven't settled your CCJ, forget about applying for normal credit cards. You'll be rejected, it'll leave a footprint on your credit file and you'll end up in a rejection spiral.

  Prepaid cards could help you adjust your spending habits, and some can even boost your credit rating.

  One way of doing this is the Cashplus Creditbuilder card, which costs £5.95 to open. It charges a £5.95 monthly fee (so in total, 13 lots of £5.95 as you're paying two in the first month), which technically counts as a £71.40/year loan. As long as you pay the fee every month for a year, this info will be passed on to credit reference agency Experian.

• Spending abroad

  

  You can also get a prepaid card to use abroad. You'll eliminate the worry about theft and overspending as you won't need to carry wads of cash around. You've got the additional perk of preventing ID theft and fraudulent transactions, as prepaid cards work like an electronic travellers' cheque.

  You may have to pay an application fee (between £2 and £7) and other costs to operate your prepaid card, but choosing to use one specifically designed for spending abroad will generally have lower, or no transaction and withdrawal fees, compared to debit or credit cards.

  For more info, go to our Cheap Travel Cards guide to see how much you'd pay to use a specialised prepaid card abroad.

Should I get a prepaid card?

For most people, getting a normal credit or debit card will be the sensible financial decision, but it all depends on why you want the card.

It could be a useful tool if you're on a tight budget as you can only spend what you've loaded onto the card. If you're a parent wanting to teach the benefits of money management to your child, it might also be a good option. Or if you want to stay safe online, you might opt for a prepaid card.

But in a nutshell, whether you should get one boils down to one thing – how financially attractive you are. If you can easily sign up for a credit card, and you have the discipline to pay it off IN FULL, every month – do that instead.

Quick questions:

How much do prepaid cards cost?

There are a number of fees associated with prepaid cards that you need to keep an eye out for:

• Application fees – You pay this one-off charge to open the account. Prices range from nothing to £10.

• Monthly fees – Some cards require a monthly fee (typically between £2 and £5).

• Renewal fees – Like standard Visas or Mastercards, prepaid cards are only valid for three years, so you may have to pay a renewal fee if you want to carry on using it. It's usually about the same price as the application fee (typically £2 to £7), however it could be waived if you top up a certain amount.

• Transaction and ATM fees – For every transaction you make, both online or over-the-counter in shops, you could be charged a fee, usually about 50p. The same applies for ATM withdrawals. These will either be a percentage of what you withdraw, or a set charge, eg, 3% or £2. Decide how you're most likely to access your money and stick with the cheaper option.

• Inactivity fees – Some may charge you a small monthly fee if your account is dormant, (if you don't make any transactions for, eg, three months). So just make sure you keep the account running – buy a packet of crisps if push comes to shove – to ensure you're using prepaid cards in the most cost-effective way.

• Redemption fees – You'll be charged a fee if you want to get money back from the card you haven't used. On average this is £10, so how much you have left on the card will decide whether this is worth taking the hit for.

The costs of using a prepaid card can add up easily, so look at the fees associated with the card before you take it out. Do the benefits of using the card outweigh the costs?

Best for spending

Low running fees, plus get up to 10% cashback

Pockit*

Unusually for a prepaid card, Pockit* pays up to 10% cashback on your spending at select retailers, including M&S (6%), New Look (7%), Ernest Jones (10%) and B&Q (5%), though cashback levels can change. It's also one of the cheapest around as it's free to spend on, though you're charged 99p for each cash withdrawal.

There's also a 99p fee each month you spend less than £500 – so if you think you won't use the card every month, look at the Optimum card below, which could be a cheaper option as it doesn't have a monthly fee.

Need-to-knows

• The card costs 99p, as does each additional card, and there's a monthly fee of 99p unless you spend £500/mth.
• If you withdraw cash using the card, it costs 99p each time.
• The card's free to load by bank transfer or debit card.
• You could use the card alongside cashback sites to maximise money earned – although only the Pockit cashback is guaranteed.
• Don't use this card to spend abroad – it charges a horrible 4% foreign exchange fee and £2.25 cash withdrawal fee.
• The main cardholder must be 18+ but additional cardholders can be as young as 13.

• Application fee: 99p
• Monthly fee: 99p (if you spend less than £500/mth on the card)
• Top-up fee: Free by bank transfer or debit card
• ATM: 99p (UK)
• Transaction fee: None
• Card issuer: Mastercard
• Overseas fees: 4% load fee, plus £2.25 to withdraw cash
• Fee to get your cash off the card: Free

Decent to use for spending in the UK

Optimum

The Optimum contactless card has no fees for spending in the UK and if you use it right, there's no cost to you after the £5 application fee.

It does charge for ATM cash withdrawals and foreign transactions though, so it's not a great all-rounder. However, if you just use it for UK spending and top it up by debit card, standing order or online banking, it's totally free after your initial £5 outlay.

Need-to-knows

• There's a £5 application fee to get the card, but then it's free to use for spending.
• Watch out for ATM withdrawals, as they're not cheap, at 2.95%.
• If you were an Orange Cash cardholder you would have been transferred to this card automatically.
• Don't use this for foreign spending – look at a fee-free prepaid travel card instead.

• Application fee: £5
• Monthly fee: None
• Top-up fee: Free by bank transfer, standing order or debit card
• ATM fee: 2.95%
• Transaction fee: Free in the UK, 2.75% abroad
• Card issuer: Mastercard
• Fee to get your cash off the card: £5

Best for teenagers

If you're looking for a card to give to teens so they can learn how to manage their money, then it's worth checking out our new guide analysing the Top cards for under-18s. It covers the best prepaid cards and children's bank accounts that allow parents a certain level of control over the cash, while still giving teens an easy way of spending both in stores and online.

Prepaid cards and bank accounts for kids offer different features so depending on what your child (and you!) want, one could be better than the other.

Best for rebuilding your credit

If your credit file's a sea of defaults, then you're not likely to be able to get a credit card, even one designed for poor credit. But there is a card you can get which purports to improve your credit file, helping you re-establish a good payment history.

Before going for this card – as it's not cheap – it's worth checking if you're likely to get any free cards by using the eligibility calculator for Credit Cards for Bad Credit.

If it's a no-go, then see if this card's right for you...

Expensive to run, but gives a one-year 'loan' to help rebuild your credit

Cashplus Credit Builder*

The Cashplus* card could help you improve a poor credit score, though it'll cost you £76 for the year to do it. Basically, you pay an application fee of £5.95, then you're 'loaned' £71.40 which you pay back in 12 £5.95 monthly instalments. This is then reported on your credit file, showing a history of good payment.

Need-to-knows

• The card costs £5.95 plus a £5.95 monthly fee.
• You have to select the 'Creditbuilder' function when you apply for the card.
• Never miss a monthly payment as it'll negatively affect your credit score.
• The card comes with purchase protection – which'll cover you if a retailer you buy from goes bust.
• You can also earn cashback on spending from 100s of retailers including Boots, Tesco, BT and M&S.

• Application fee: £5.95
• Monthly fee: £5.95
• Top-up fee: Free by bank transfer, standing order and at the Post Office
• ATM fee: £2
• Transaction fee: Free in the UK
• Card issuer: Mastercard
• Fee to get your cash off the card: £10

Cashback sites may pay you for signing up

As an extra boon, members of specialist cashback websites can be paid when they sign up to some financial products. Do check that it's exactly the same deal though, as terms can be different. And remember the cashback is never 100% guaranteed until it's in your account. 

Full help to take advantage of this and pros & cons in our Top Cashback Sites guide.

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