Prepaid cards Prepaid card pros and cons

Pros of prepaid cards

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Stay in the black

Fans of prepaid cards point out that they are highly flexible alternatives to debit and credit cards. Major benefits include the fact that you can’t spend more that you have on the prepaid card. This makes them a valuable aid to budgeting, helping to prevent you falling into the red.

Prepaid cards are widely accepted

Prepaid cards are a widely accepted means of payment, both here and abroad. You can use prepaid cards to pay bills, which could be preferable to sending cheques through the post if you don’t have access to a debit or credit card.

Fraud protection

If you're worried about card fraud and identity theft, a prepaid card could be a good option as they're not linked to your bank account and are PIN-protected. You can also use prepaid cards to buy goods online, safe in the knowledge that a fraudster who managed to get hold of your prepaid card details could not run up credit at your expense.

Replacement prepaid cards

If you're planning to use a prepaid card abroad, they are safer than carrying cash and are a handy alternative to traveller's cheques. Like traveller's cheques, your money is safe and replaced if the prepaid card is lost or stolen. 

However, you may be charged for calling the customer helpline and for emergency card replacement by courier (up to £35). Exceptions include Travelex, which operates a 24-7 freephone emergency number and offers free money transfer anywhere in the world for lost or stolen prepaid cards.

Fixed exchange rates

Prepaid cards generally come in three currencies: sterling, US dollars and euros. With dollar and euro prepaid cards, the exchange rate is fixed at the time of loading, which can be an advantage if you expect currency rates to fall. 

No foreign-exchange fees on purchases

Unlike most debit and credit cards, prepaid cards don't charge foreign-exchange fees for purchases made abroad, provided the local currency matches that on the card. However, there will usually be a cross-border fee, for instance when using your sterling card in the eurozone – typically 2.75%, but it can be higher.

Chargeback on prepaid cards

If you have a Visa prepaid card you may be able to claim back any losses from the card provider using the chargeback mechanism. So if a purchase goes awry, you are the victim of theft or fraud, or if a purchase doesn't arrive or is not as described, contact your prepaid card provider to put forward a claim. 

Prepaid card cons

While there are a number of genuine benefits to having a prepaid card, they must be weighed against the disadvantages – chief among which are the numerous charges imposed by prepaid card providers.

Prepaid card charges

In almost all of the 35-plus prepaid cards currently on the market, at least one of the following charges is enforced. Each would be enough to water down the appeal of the cards.

Common charges include:

  • application fees (usually up to £10)
  • monthly fees (eg £5)
  • top-up fees
  • transaction fees (eg 3% of the value of each purchase)
  • UK and overseas ATM withdrawal fees (typically up to £3).

Inactivity fees

In addition, some prepaid card providers will also impose a charge if you don’t use the prepaid card for, say, over a year. This is especially unfair as you won’t earn any interest on money held on a prepaid card, either. 

Lack of section 75 protection

Aside from charges and the lack of interest earned on prepaid cards, there is no protection for losses under Section 75 of the Consumer Credit Act. So, you might be better off opting for a Visa-backed prepaid card to receive cover under the chargeback system.

Avoiding embarrassment with prepaid cards

As you can't get any credit on standard prepaid cards (hence they are not prepaid credit cards), you must make sure that you have enough money loaded on them before making purchases or withdrawals. Otherwise you could find yourself in an embarrassing situation at the cashpoint or checkout.

With these disadvantages in mind, it might be worth considering a credit card which offers low fees on overseas spending. 

Which? Comparison Table - Best credit cards for overseas spending - our tables are updated in real time

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