When credit cards first hit the European market consumers needed to have excellent financial histories in order to qualify. That waned somewhat in the 1990s, but once the financial crisis hit in 2007 it once again became difficult for those with a poor credit history to obtain traditional credit cards.
In a world where people are less likely to carry cash, the prepaid card has stepped in to take the place of the credit card for plastic purchases. Consumers no longer need to fret over not having a credit card if they have the cash to put into a prepaid card. However, users beware: prepaid cards are not everything they are cracked up to be.
Definition of a Prepaid Card
In simple terms, a prepaid card is simply a plastic representation of cash that you have deposited with the issuer of the card. When you use a prepaid card to make a purchase, the company that sold you the product or service then bills the issuer of the card. Money is transferred from the issuer's bank account to the merchant's account.
Some retailers market these cards as "prepaid credit cards" even though they are really not. A credit card allows the cardholder to make a purchase based on the assumption that individual will repay the credit card company at a later date. Credit cards are just a plastic version of a small consumer loan.
A prepaid card involves no credit whatsoever. Whatever money you spend on purchases has already been deposited with the issuer of the card; that company is obligated by law to pay the merchant from whom you purchased. Prepaid cards are branded by companies like Visa, MasterCard, and Maestro as a means of guaranteeing merchants will be paid.
Reasons for Using a Prepaid Card
Prepaid cards have not taken off as quickly or aggressively as issuers would have hoped, and perhaps that's because UK consumers do not understand the convenience they offer. That said, what are some of the reasons someone might use a prepaid card instead of credit or cash? Consider the following:
- Credit Purchases without Credit - There are times when you might make a purchase requiring some sort of security be provided via a credit card. A car rental is a good example. When you go to pick up the car, the agency may require you to submit a credit card just in case they need to assess other charges after you return the vehicle. If you do not have a credit card, this could be inconvenient. A prepaid card solved that problem.
- No Need for Cash - Some people are just uncomfortable carrying around enough cash to sustain them from one pay cheque to the next. When they use a prepaid card, it takes the place of cash. So many retailers now accept Visa, MasterCard, and Maestro that most people could probably get by never carrying cash again.
- Security When Travelling - Thirty years ago, the standard for travelling abroad was to carry traveller’s cheques and just a little cash. However, traveller’s cheques are almost unheard of these days given the prevalence of internationally recognized credit cards. A prepaid card takes the place of travellers cheques and allows you make purchases anywhere in the world where the brand of your card is accepted.
In a nutshell, the prepaid card gives you the convenience of a standard credit card without actually having to procure one. Whether you have bad credit, or you are just not interested in a standard credit card, the prepaid card comes in very handy.
How Prepaid Cards Work
There are basically two types of prepaid cards in the UK: short term and long term. A short-term prepaid card can be purchased at a petrol station, pharmacy, supermarket, and so on. The intent of the short-term card is that consumers will fill it once or twice and then be done with it. As such, there are higher fees associated with short-term cards.
The long-term card is designed to be used on an ongoing basis. You might purchase one of these cards from a local retailer or apply for one from your bank or one of the companies with which you regularly do business. Long-term cards often come with application fees and annual renewal fees.
Regardless of which type of card you choose, the process is the same. Here's how it works:
- you purchase an empty card and fill it for the first time
- you then use the card for purchases while keeping track of how much money you're spending
- with each transaction the card issuer charges you a certain fee, thus reducing your balance accordingly
- you refill the card when the balance gets low
If you think of a prepaid card in the same vein as a prepaid mobile phone, as suggested by Which?, it becomes very easy to understand how the process works. And like a prepaid phone, you can never spend more money than you have because it is not possible to exceed the card limit.
Benefits of Prepaid Cards
There are some benefits to using prepaid cards over cash and credit. For starters, they are better than credit cards in some cases because their predetermined limit prevents users from unintentionally going into debt. In other words, you must make a conscious choice to add cash to the card rather than being able to spend mindlessly without thinking about what you are doing.
Here are some other benefits:
- PIN protection reduces the risk of fraud
- prepaid cards are a great way to teach children how to budget
- accounts can be managed online or over the phone
- prepaid cards can be used to make international purchases
- some card issuers offer cash incentives that can actually work in your favour
Things You Need to Be Careful About
If you've read this far, you might be thinking prepaid cards are a pretty attractive deal. Perhaps they are for your circumstances. However, understand that they are not the panacea for credit problems some retailers make them out to be. In fact, there are some things you definitely need to be careful about when using prepaid cards. For example:
- Transaction Fees - Those who issue prepaid cards must make a profit in order for the business to be worthwhile. They make their money through transaction and service fees. Whenever you make a purchase with a prepaid card, the issuer deducts money from your balance as a transaction fee. At an average going rate of about 3% of the transaction total, that can add up to a lot of money.
- Application Fees - If you are applying for a long-term card, you'll likely pay an application fee or card purchase fee to start. Some issuers’ charge this fee only once for as long as your account remains open. Others may assess a renewal fee after a year or a reinstatement fee if you haven't used the card for some time.
- No Purchase Protection - Although prepaid cards are protected against fraud by the use of PIN numbers, the goods and services you actually do purchase are not protected in the same way they are with a standard Visa or MasterCard credit card. With a credit card, you are protected should you need to return goods to an uncooperative merchant. When you pay with a prepaid card, no such protection exists.
- Load Limits - There are load limits on some cards designed to protect the card issuer. Those limits can either be at the minimum or maximum level. Be sure to know the load limits of any card that you are considering before you purchase it. This is especially important when talking about a minimum amount required to be kept on the card. If you fail to keep that minimum, you might be charged a hefty service fee.
Alternatives to Prepaid Cards
If you are unable to obtain a standard credit card, you can still use cash as an alternative to prepaid cards. It is not as convenient or easy to use, but it also doesn't cost you anything. You'll never pay a 3% transaction fee for using cash to purchase your groceries, petrol, clothing, etc.
Your other option is to apply for a credit card if you are pretty sure you'll qualify. When your credit card arrives, use it just as you would a prepaid card. In other words, deposit money into your bank account to be used against your credit card purchases. As long as you do not exceed that amount, you'll have enough money to pay your bill at the end of the month when it comes due.
The credit card option is especially attractive if you can find an issuer offering a cash back reward. Those cash back rewards translate into the card issuer actually paying you to use the card. This only works, however, if you pay your bill at the end of the month in order to avoid interest charges.
Prepaid cards offer consumers a great way to make regular purchases without having to carry cash. They are also more convenient when you travel, can be a substitute for standard credit cards in some cases, and make international and online transactions so much easier. You might consider getting a prepaid card or two if you're unable to establish traditional credit or you simply want to avoid credit cards altogether.
There are dozens of different companies offering prepaid cards in the UK. Most will carry one of the four major credit card brands. As you shop, be careful to pay attention to all of the fees each company charges so you are not surprised later on. The following links will get you started with some of the more well known issuers:
MasterCard - As one of the four major international credit card issuers, MasterCard is a brand you can trust, even for prepaid cards. Learn all about the cards they offer here and shop for one online when you are ready.
Visa - This is probably another name you've already come to know and trust. On the Visa site, you can read about their different types of prepaid cards, compare fees, and locate retailers that offer cards under their brand.
Virgin Money - You may know them for their airlines or mobile phones, but Virgin also issues prepaid cards through their Virgin Money division. Browse all other options online and then apply when you are ready, right from your web browser.
Western Union - When you follow this link you'll be taken to the prepaid card site from Western Union. These cards are meant to be long-term, so the site is set up to allow you to purchase, check balances, and reload anywhere you have an Internet connection.
Maestro - This site gives you access to prepaid cards from a Maestro. They do a fairly good job of explaining how the cards work and what you can expect from them. If you are ready to find a card, they have an automated tool to help you.
Freedom Card - An online prepaid card retailer offering products branded by MasterCard. They even allow you to design the look of your card to match your own personality. They have different types of prepaid cards for students, everyday use, overseas travel, and so on.
Sterling Card - Offering several different types of prepaid cards with branding by MasterCard, Post Office, and Cashplus. This is also one of the few issuers offering cash back rewards on a selection of their cards.
If you would like to see a comparison of prepaid cards from several different issuers all in one place, you might want to try a comparison website. Comparison websites make the job of shopping for prepaid cards a bit easier. Check out the following links to see what we mean:
Money Super Market - Compare dozens of different cards from multiple providers here. You can get cards valued in Sterling Pounds, Euros, or American dollars.
Confused.com - This site offers comparisons on every day, pay monthly, and traditional prepaid cards from various issuers. You can see deals side-by-side and compare things like transaction fees and card limits.
Money.co.uk - Comparisons of 27 different prepaid cards can be found here side-by-side. The easy-to-read chart shows you purchase price, transaction fees, monthly fees, and more.
Money Saving Expert - If you're looking for a guide to prepaid cards, this site is for you. They explain what these cards are, how they work, whom they benefit, and the dangers you need to be aware of. A very helpful site indeed.