In some respects prepaid credit cards are very similar to many other payment card types. They are made of plastic, they each have a unique number associated with a particular account holder, and they enable users to make payments wherever they see the payment processor symbol featured on their card.
But prepaid credit cards also differ from other card types. Unlike traditional credit or debit cards (linked to an overdraft), there is no opportunity to access a credit line with a prepaid payment card. Indeed the phrase ‘prepaid credit card’ is something of a misnomer, and owes more to the fact that ‘credit cards’ are so ubiquitous in the UK that the name is used interchangeably with other payment cards.
Prepaid cards perhaps have more in common with gift cards than they do with credit and debit cards. As with gift cards, individuals using prepaid cards can only spend monies have been loaded to the account associated with the card before the transaction is undertaken. However, unlike most gift cards, prepaid products also don’t (generally) restrict use to a particular chain or group of stores, and they are designed to be reloaded with additional funds to enable continued use.
In essence, prepaid cards are a very unique type of payment card. They may not offer all the features associated with other payment cards, yet where the differences lie, they are deliberate and often as much an advantage as they a disadvantage to people using prepaid cards.
All prepaid cards share a simple set of generic benefits, such as:
Over the past few years, interest in prepaid has grown exponentially, fuelled partly by the increasing diversification of the products.
A market that was dominated by a few big telecoms brands offering simple payment cards has fragmented into a myriad of niche product categories, spawning a range of new advantages. Some of these are unique to particular cards, but others are shared by entire categories. Unique benefits include:
As with any financial product, prepaid cards have disadvantages. Some of these are to be expected, as they are intrinsically linked to the product benefits (individual customer circumstance and perception being the differentiator). These include disadvantages include:
Some ‘top up’ charges
Some high “Foreign Exchange Fees” (card dependent)
Short card expiry period and replacement charges
Many of these disadvantages are the result of costs imposed as a result of transparent fees for specific functions which cost the issuer to undertake. Of course, these charges are also met by suppliers of competitor products. The only difference is that they are not charged directly. At the point of delivery they appear ‘free’, as competitor products meet these costs by making money elsewhere (often in the form of penalty charges). Arguably, prepaid cards are fairer and more transparent to their users, but it very much depends on viewpoint.
Prepaid cards have a number of uses, some of which are surprising to those with little experience of these products.
Assuming a prepaid card has money loaded on it, it can be used in much the same way as a credit or debit card to make payments both in physical locations and online. There are exemptions to this whereby restrictions can be placed on cards so that they can only be use for certain purchases (e.g. filling stations with business prepay cards or clothing stores for a child’s clothing allowance), but without an intervention no restrictions exist.
Most prepaid cards offer their users the ability to withdraw cash from ATMs. Depending on the particular card and account, there can be a charge for this service (either a fixed charge or a percentage of the amount withdrawn). To further complicate this, certain ATMs can be free, whilst others charge. This is especially true of ‘Travel Prepaid Cards’, which often offer free withdrawals in certain nominated currencies (e.g. Euro or Dollar), but charged withdrawals for sterling (GBP) ATMs.
Prepaid cards have always drawn comparisons with debit card products issued by banks (especially those offered with basic accounts, which do not extend a line of credit), but further improvements to certain products have meant they can be used for an array of banking functions, and have made them a viable alternative to some basic bank account products. For instance, some prepaid cards (or ‘prepaid bank accounts’) enable users to use an account number and sort code to automate bill payment with direct debits. Users can also set up direct debts to transfer money to other accounts on a defined date.
Although prepaid cards do not offer credit in the same way that credit cards do, some can still be used to help individuals build their credit score. They do this by classifying the monthly fee that they charge as a line of credit. They then report back to credit bureaus that the payments have been made in full and on time.
It’s true that the low amounts charged in terms of monthly fees might not go a long way to convincing a future lender to extend a great deal of credit, but for those looking for smaller amounts, the fact that they can demonstrate an ability to make ongoing monthly payments is certainly likely to be viewed in a positive light by prospective lenders.
Perhaps the area that has seen the greatest number of prepaid card users is the travel prepaid space. These cards are offered by a number of established and challenger brands, and are primarily used by tourists when abroad to buy goods (as they might be using their debt card in the UK) and withdraw local currency from ATMs.
These cards are popular with UK tourists for a number of reasons, including the fact that they minimise the risk of losing a debit or credit card abroad. The fact that they enable people to set a specific budget for their holiday, and the fact that many enable people to lock in favourable exchange rates well before they plan to travel.
Prepaid cards are also increasingly popular with online gamblers, who appreciate the fact that they can restrict their gambling when they are feeling dispassionate.
There are also advantages to use a prepaid card instead of a credit card, as gambling transactions are considered by issuers to be cash withdrawal and therefore attract immediate interest (usually at a far higher rate than standard purchases).
Nowadays, prepaid cards are so popular with gamblers that some prepay issuers have actually developed products specifically marketed to gamblers, whilst some online gambling websites have launched their own prepaid cards.
As prepaid cards offer no credit line (and therefore do not require a credit check prior to acceptance), and offer transparent pricing and directly deductible charges for the different functions they enable, they can be made more widely available than credit and debit cards.
Therefore, as well as being available to those who would be accepted for conventional credit cards and bank accounts, prepaid cards are also available to people who might not think they could enjoy the convenience of payment card, including:
Although certain credit cards are available to some people with bad credit, they are not always the most suitable products for people who know that they struggle to manage credit.
The restrictions that prepaid card place on their users can be a useful tool to people who struggle to control their spending, reducing the amount that they can spend and protecting them from the often prohibitive interest rates credit card issuers are required to impose to ensure they can still profit in the face of higher levels of bad debt.
People with CCJ’s and declared bankrupt Having a CCJ or being declared bankrupt make obtaining a credit card or bank account with an overdraft very difficult. Most UK card issuers automatically reject people who have had either occur within the past year; yet as online shopping continues to grow, a payment card has become ever more essential.
For people in this position, a prepaid card offers one of the few opportunities they have to transact online. Although direct costs associated with the different functions one undertakes using a prepaid card appear high when compared with credit and debit cards, these functions all cost the issuer money to facilitate. Credit and debit card providers can offset these costs with interest charges to avoid direct costs that might discourage card use. However, clearly someone is paying for these charges and since “good” customers effectively avoid fees, it is arguably those in most difficulty who are paying for better customers to enjoy “free” services.
Although some banks do offer debit cards to children, credit is technically not available to people under the age of 18.
In some instances, children can be named as secondary cardholders on a credit card account, but the credit is associated with the main account and not them directly. Of course, trusting as they might be of their offspring, many parents (and guardians) do not necessarily want to give their children credit cards, on which they could theoretically run up considerable balances.
However, payment cards are very popular with children and younger people, and prepaid products often offer of a happy compromise. Parents (and guardians) can load the card, and in some instances they can restrict the categories for which the card can be used. Children and younger people can use the cards to make purchases with no risk that they might run into debt, and with an emergency “top up” just a quick call away.
People with concerns regarding the security of their accounts, or of using their credit or debit card details online, often find that prepaid cards can be used as a useful barrier between potential threats and their wider personal finance arrangements.
By preloading a card with no credit facility, they drastically reduce the opportunities that criminals have to obtain sensitive financial data for the cost of a few pennies per transaction.
For whatever reason, certain individuals do not necessarily want their spending to be available. Prepaid cards often offer a great vehicle for this. They can be discreetly ‘topped-up’ from a bank account, leaving a single line on a bank statement with no compromising indication of the final destination of the monies. They also send no paper statements, so individuals’ prepaid spending can be known only to themselves and their online interface.
Remember: Prepaid cards cannot be used to undertake illegal activities. Account holders are required to provide their name, age and address and there are restrictions as to the amount a prepaid account can hold, which helps prevent money laundering.
There are a number of different ways that prepaid cards can be topped up. In some instances ‘top up’ methods are free, but some do incur direct fees charged to the prepaid account. Some methods, whilst not causing people to incur direct fees, can lead to indirect fees being charged to those who have used them to ‘top up’ a card, so it is important to give due consideration before ‘topping up’.
Perhaps the simplest way to ‘top up’ a prepaid card is by bank transfer (BACS). This might be a single transfer or a series of standing orders. This method usually incurs no ‘top up’ fees, although there are limits on the amount that can be credited per year. Funds can also take some time to become available for use in an account.
Some prepaid cards offer a service enabling card holders to top up their account with cheques made out in their name. This usually requires account holders to print a specific paying in slip and go to a particular bank, which is authorised to process cheques. This service usually incurs a fee and cheques can take a few days to clear.
Not all prepaid issuers allow ‘top up’ via credit card. Where they do, there is often a charge (usually higher than the equivalent debit card charge). It should also be understood by the person whose credit card is used to complete the ‘top up’ that their credit card issuer is likely to classify the transaction as a cash advance. They are therefore likely to incur immediate interest on the money they have transferred (at a higher rate than their standard purchase APR).
Many prepaid accounts offer an online interface where debit card ‘top ups’ can be completed. This method often results in funds being made available immediately, but restrictions usually require the debit card to be registered at the same address as the prepaid card. Typically, debit card ‘top ups’ do incur fees.
The UK PayPoint network extends to over 28,000 retailers. Most prepaid cards can be ‘topped up’ in these locations by handing cash over at the checkout and swiping the card the funds are destined for through a PayPoint terminal. Funds credited this way are usually available immediately, but there is usually a fee of around 3% for completing these transactions.
Many prepaid cards offer Post Office ‘top ups’, which are completed at a Post Office counter. Often this service is free, but funds usually take one working day to be processed (meaning a long wait for monies credited over the weekend).