Pre-paid cards are becoming ever more popular, but many people are in the dark as to their best uses, which consumers they best suit or how they actually work. Luckily, here at FinanceNet we’re able to shed some light on the matter.

How Do They Work

A pre-paid credit card works in much the same way as a mobile phone top up, gift card or underground travel pass. You pay a certain amount into the card’s account, which is then available to spend on the card.

This means that, unlike a traditional credit card, using a pre-paid credit card does not involve borrowing any money. The available balance is made up entirely of your own money, rather than the card providers. So, no matter what you do, there is no chance that you will put yourself into any debt, you will simply run your credit down.

The cards are also very convenient, allowing you to access funds from ATMs, buy goods online or in stores without having to carry cash around.

Control

The sting in the tail with a regular credit card is that the interest the mounts up on a negative balance. Not only is there the temptation to use money which is not yours to buy things you can’t afford, there’s the added cost of the interest, which will keep growing the longer you fail to repay it. This is one way people spiral into debt.

This is not possible with a pre-paid credit card, as there is no interest and the limit on the card is dependent on how much you choose to put on it, making it the ideal tool for those determined to draw up a budget and stick to it.

For the same reason, pre paid credit cards can be a great way for parents to teach their teenage children about money and spending. It will give them the freedom to withdraw cash from ATM’s and to spend in shops, but it also places strict limits on their spending.

On the other hand, if you want to make sure a loved one does not run out of funds, if they are out of reach or travelling, pre-paid cards are ideal, as you can top up the balance for them without needing to have the actual card.

You can top up pre-paid cards with money by transferring money from a bank account, paying in at a Post Office branches or any of the many convenience stores around with PayPoint or Payzone signs displayed.

Security

In these times, when credit card fraud is becoming an increasingly widespread problem, the added security of using a pre-paid card is very attractive. As with a credit card, a fraudster would need all of the cards details and the PIN number to access funds, but there also a number of other safety factors that come with a prepaid card.

For one thing, as the balance is limited to what you place on a card, even they get the card’s PIN a fraudster could only spend that set amount. He couldn’t run you into debt, empty your account or give you a massive credit card bill. On top of this the card can be cancelled instantly if you inform the provider that it is missing.

When you do this the provider will supply you with a new card and, what is more, the funds remaining on your old card will be transferred to your new cold, effectively snatching your money back from the thief and replacing it in your hands, where it rightly belongs, something that very rarely occurs when cash is stolen.

However, with pre-paid cards you do not get Section 75 protection, which entitles you be refunded for purchases worth between £100-£30,000 if the goods aren’t delivered or aren’t as described.

Foreign Travel

Pre-paid credit cards are now extremely popular with people going abroad as they often have very competitive exchange rates and, as they are an effective budgeting tool, are very good at ensuring you don’t go overboard when you’re abroad.

As well as normally having better exchange rates than most high street banks, they are also often immune to the expensive charges associated with using a card abroad.

The fact they are not linked to your bank account make them more secure than carrying a card in countries where card cloning scams directed against tourists are common. Needless to say, they are also preferable to carrying lots of hard currency.

Poor Credit

As there is not usually any borrowing involved in using a prepaid card, there are also no credit checks involved in the application stage. This means that, provided you can pay the application fee (normally about £5-10, if there is one) you are guaranteed to be accepted, regardless of your financial history.

Whilst the majority of prepaid cards will not affect your credit score, there are some which are specifically designed to help boost your credit score. These work in a very simple but affective way.

Some pre-paid cards will charge you a monthly fee for their use. Instead of doing this, pre-paid cards designed to build your credit will give you an interest free loan, which you then pay back in monthly instalments, equivalent to what you might have otherwise paid as a fee.

This will boost your credit score as it will show you can handle a loan, but you still don’t run the risk of overspending on your card or wracking up lots of interest. Just think of it as a fee for your card that also boosts your credit score!

Charges

There are various charges associated with the use of a pre-paid cards. There is the cost of acquiring the card, this can be up to £10 but is often cheaper, or even free.

You can also be charged for a transaction fee for using your card. Many cards have no transaction fees at all. These come recommended as transaction fees normally end up being the biggest cost of using the card. Others have limited small charges for each transaction. However, there are cards that charge a % transaction fee, normally about 3%. Watch out for these, especially if you are thinking of making big purchases as they will really cost you.

Finally there are some cards that charge a monthly fee for using the card, but many do not, which is obviously preferable.

Two charges that are very consistent are the top up and withdrawal fees. These are the amounts you are charged when you load the card with money or take it funds from a cash machine. These can be charged as flat rates or as percentages. Again, the most cost effective way to handle this is to avoid percentage charges, and pay in/withdraw larger, infrequent amounts, rather than regular, small amounts.

You should compare all these costs when picking the card for you.