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Prepaid cards, whilst far from being the "new kid on the block" as far as payment methods go, are having somewhat of a Renaissance in this era of international travel and changing attitudes towards multiple lines of credit.

What is it and how does it work?

Although it may look just like them, including the chip and PIN payment function, a prepaid card differs from a standard credit or debit card in a number of ways.

Firstly, it is not linked to your bank account. This means it does not function as a little door to your money, as a debit card does. Instead, you ‘load’ a set amount of money onto it that you can then spend as you wish. It works much like old school mobile phone pay-as-you-go contracts, where you could upload money onto your phone and spend it on calls and texts until the money ran out.

This leads us on to the second major difference between prepaid and standard payment cards; there is no credit system in place with a prepaid card. Once you’ve spent the preloaded amount, then you can’t spend a penny more.

What are the benefits?

You may well ask what the benefits are to a card doesn’t give you direct access your money and takes time and effort to load up each time. Be assured however, that the benefits are many and various.

  1. It is not linked to your credit rating. Because the money on the card is already accounted for, it means you can spend the money without worrying about it having a negative impact on your bank account, and therefore your credit rating. You will not be stuck with any outstanding payments that you cannot make.
  2. You can’t overspend. In much the same vein, you cannot spend money that you do not have when you use a prepaid card. It will stop you getting into debt and make you more aware of what funds you have available to you, and how they need to be spent.
  3. It’s not linked to your bank account. This means that if you lose it, or if it goes missing, that you don’t need to worry about someone accessing your hard earned cash or savings account. The most you could ever lose would be the outstanding balance on the card.

What are the drawbacks?

  1. There’s nothing extra If you find yourself in a jam and need a little ‘extra’ cash that you don’t strictly have right now, then the option of dipping into an overdraft just isn’t there. You have to know how to live within your means.
  2. Lack of cover. Although you don’t stand to lose money from your bank account if your prepaid card goes missing, it needs to be said that consumer protections on prepaid cards are not as comprehensive as those on credit or debit cards, and so it’s unlikely you will ever see that cash again in the form of compensation from the bank.
  3. Fees, fees, fees. Depending on which card you choose to buy, you could be charged a small fee every time you choose to top it up. That’s why it’s worth shopping around and comparing offers provided by different companies. Similarly, if you need to take cash out at an ATM, or refund money back off your card into your bank account, be warned that these usually come with hefty fees with most cards.

Why would I bother getting one?

There are many reasons why getting a prepaid card can be a great financial choice, but the two main ones are:

  1. Travel: When you go abroad, it can sometimes be stressful trying to navigate the best way to handle finances. Should you take your debit card from home and risk theft, loss, or expensive exchange rate fees when you take money out at an ATM? Or, should you exchange cash before you leave and then carry around large wads of cash with you wherever you go? Prepaid cards are the answer to all of these worries. By having a card you don’t need to worry about indiscreetly carrying around large rolls of money, but equally, you don’t need to risk the loss of your debit or credit card and all the headaches and worry that that would entail.
  2. Self control: If you struggle with budgeting, or perhaps have trouble with impulse control when shopping or on a night out, then this could really be the answer to your prayers. Restricting yourself to a certain amount of spending money each month can make you more mindful of your outgoings and really help you understand where you are spending your money, and what on. It has the ease of a debit and credit card without the spending pitfalls.

There are many reasons why getting a prepaid card may or may not be for you, however it always pays to be up to date and informed of all financial choices and tools that are available to you.