Monday 3 May 2010

What are prepaid cards and how do they work?

What are prepaid cards and how do they work?

Prepaid cards look like credit and debit cards and they offer the same ability to purchase products and services but with a crucial difference – you can only spend the balance that has been preloaded onto the card. This means there is no risk of running into debt as it has no credit or overdraft facility.

You will be give a Pin number when you purchase a card, and once money has been credited, it can be used in the same way as a debit or credit card – for high street, online or telephone purchases, as well as cash withdrawals from ATMs.

Money can be loaded onto a prepaid card by cash at a bank, Post Office, at Payzone or PayPoint terminals or via a bank transfer. However, not all prepaid providers offer all of these loading options, so you need to bear this in mind when comparing deals as some are more flexible than others.

What are the advantages of prepaid cards?

The main advantages of prepaid cards include:

* Availability - there are no credit checks, which means you can get a card without worrying about your credit history. All prepaid card providers will carry out an identity check to confirm you are who you say you are.
* Control - prepaid cards are an ideal way to budget for yourself or help to manage your children's spending. Like a credit card you get a full breakdown of spending on the card so you can see what has been purchased, who from and when.
* No debt risk - with a prepaid card there is no chance of spending too much as you are limited to the amount you put on your card.
* The card for travel – prepaid cards are a good option if you are going overseas. They are popular with students heading off on gap years and children who go abroad on school trips as parents can load them up here in the UK. However, the benefits are not restricted solely to young travellers - any holidaymaker can take advantage: prepaid cards offer a good alternative to travellers' cheques. They are safe and you will probably be offered a better rate of exchange as you spend.

Is there anything to watch out for?

The main disadvantages of prepaid cards are the costs and fees associated with using them. Some of the potential costs to look out for include:

* Card application fee – some providers levy an application fee but read the small print as it may be waived if you load more than a certain amount onto the card.
* Monthly service charge – check to see if there is a monthly subscription fee. If there is what services do you receive for this charge? For example, does the prepaid card company provide free top-ups, an online service, a helpline or other additional services for you, funded by this fee?
* Customer call helpline – calls to the customer helpline can be expensive so it's worth noting whether you will be charged at a premium rate, national rate or standard rate.
* Credit card or cash loading fee – some providers charge you every time you put money onto the card.
* Deposit fee – even if your card provider doesn't charge you for making a top-up, if you put money onto the card in a bank, the bank may charge for the service. If such a fee applies use an alternative way of loading up your card – if there isn't a convenient alternative it's probably worth considering a card from a different provider.
* ATM withdrawal fee – some prepaid cards are treated like credit rather than debit cards when it comes to making cash withdrawals. If you will be charged a fee for withdrawing money from an ATM it is advisable not to use the card for this purpose. And even if you are not charged for making withdrawals in the UK, check what the rule is for foreign transactions as you may be charged if you withdraw money from a cash machine abroad.
* Purchases and internet transaction - Is there a charge when you purchase goods on your card and do these vary for online transactions? Again, as with withdrawal fees, these costs may be higher if the transaction is made overseas.
* Account termination fee - is there a charge for closing your account?
* Card replacement – one of the attractions of prepaid cards is the security they offer, but if you lose your card or have it stolen, some providers will charge for a replacement.
* Card renewal - like a credit or debit card, a prepaid card will have an expiry date so check to see if you will be charged for a renewal.
* Inactivity fee – some firms charge a small sum if the card is not used for a defined period of time.

Which card is right for me?

It makes sense to look for a prepaid card with low sign-up, annual, monthly and top-up fees. However, there are other things to consider when deciding on the right card for you:

* What are the reload options - can you pop into a local bank, can you reload online, etc? If you can only top your card up at the place you bought it from, it won't be much use if you're heading off abroad.
* Can you manage the card online – as with many debit and credit card accounts, some prepaid cards allow you to view transactions and usage online, which can be very useful.
* If you want a prepaid card because you're going travelling or to work abroad, it's worth opting for a provider that offers a 24-hour service as you never know when you might need to top it up, and if you are in a different time zone, it may be difficult to load your card up during UK working hours.
* If you want two cards for the same account, look for a provider that doesn't charge a fee for an additional card.

As with a credit card, shopping around is the key to getting the best deal for you. At the moment the prepaid card market has relatively few providers compared to the credit card market but competition is beginning to intensify which will in turn drive down costs and increase service.

Moneysupermaket.com's price comparison tool enables you to compare prepaid cards, their fees and additional benefits such as reload options and whether you can manage the account online, so you can easily identify the most suitable card for your needs.

What is a prepaid card?

It's a payment card that works like a credit/debit card, except you cannot run up a debt – you can only spend the money you've already loaded on to it and it is not linked to a bank account.

Why would I need one?

Many reasons: You may have a poor credit history and/or be unable to get a bank account. If so, you will be able to get a prepaid card because there are no credit checks.

How can I shop with it?

It can be used like any credit/debit card in shops, online, on the phone or using mail order. Many of the cards are backed by the major card schemes (MasterCard/Visa/Maestro) and accepted by most retailers.

Can I use it to withdraw money from a cash machine?

Yes, in most cases. Your card will have a PIN number but you can only withdraw funds already loaded on to it.

Will it work abroad?

Yes. If it is backed by a major brand – MasterCard or Visa, for example– it will be accepted by millions of retailers and banks worldwide.

Where can I load money on to the card?

This varies from card to card but normally you can transfer funds from a bank account, either at a bank branch or online, or load cash on to the card at post offices and PayPoint. Your card provider will give you details.

Can other people load money on to my card?

Yes, if they have your name, card number and bank details. This is why the cards are so useful for parents wanting to keep their children afloat financially. Even your employer can load your card – you can have your wages paid directly on to the card instead of into a bank account.

Can I make regular, monthly payments from the card?

With some cards, yes. Check the terms and conditions of any card that interests you.

Can I get additional cards for the same account?

Yes, for a fee. You, as the primary cardholder, will be responsible for all charges run up on the account.

Will I get any interest on the money in my account?

No. Prepaid card accounts do not pay interest.

How safe are they from fraud or theft?

Very. The card can be blocked or cancelled once the theft is reported, which you must do as soon as you discover it. In any case the card cannot be used without your PIN number and signature even then a thief could only take what is loaded on the card . . . they could never run up a huge debt. Some card providers, though not all, will refund money taken from your card in the unlikely event that criminals do manage to use it.

What's the minimum age for applying?

It varies – some cards have no minimum age, others are only for 18s and over, check the terms and conditions of the card before deciding to apply.

Can I have more than one card?

Yes. You can have as many as you like. But bear in mind you may pay fees on all of them, which could add up to a substantial outgoing.

What are the downsides?

There are very few downsides other than the fees. The only key thing to do is keep a regular check on your account to avoid the embarrassment of your card being rejected by a retailer. Remember, once your money has run out the card will no longer work.

Where can I get one?

Moneysupermarket.com's price comparison tool enables you to compare prepaid cards, their fees (including withdrawal fees and monthly fees) and additional benefits such as their reload options and whether you can manage your account online.

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