Prepaid cards

A prepaid card is like a pay-as-you-go mobile phone – you top it up with money in advance.

You use it like any other payment card, in shops or online. Most prepaid cards work at cash machines too. Most retailers accept them, but not all do so always have a backup way to pay. And be aware that you can’t use them for transactions that require a security deposit or preauthorisation, such as car hire firms, hotel bookings and at some petrol stations. 

The card isn't linked to a bank account. You can have your wages or benefits directly sent to your prepaid card, or load cash onto it at participating reload locations.

Because you can only spend the money you put on it, you can't go overdrawn or run up a debt. Negative balances are not usually permitted, so if you try to spend more than your available balance, the transaction will simply be declined. Your payments won't be recorded on your credit report, and how you use the card won't affect your credit score.

Before you choose a card, it's worth checking the limits that apply, as these vary between providers and can be quite restrictive. Key things to look out for include:

• daily or weekly load limits (how much you can add at a time) 

• a maximum balance ceiling (the most the card can hold at any one time), and

• spending caps on individual transactions or over a given period.

Typical load limits can range from as little as £50 to several hundred pounds per day, and maximum balances are often capped at between £500 and £5,000 depending on the provider. Cards may be for one-time use, like gift cards, or reloadable.

No two prepaid cards are the same when it comes to fees, so always check before you choose.

The fees can include:

• application fees
• top-up fees
• monthly fees
• renewal fees every three years – some may charge to issue a replacement card when it expires
• UK and overseas cash-machine withdrawal fees
• transaction fees – for example, 3% of the value of each purchase
• inactivity fees – you get charged if you haven’t used your card for a certain period of time
• fees to move unspent money back from the card.

Look for cards that have the lowest fees for how you’ll use it. So if you know you’re going to be using the card for spending, look for a card without transactions fees on purchases. 

Prepaid cards are a good way to make sure you stick to a budget. They can be a good idea if you’re looking for:

• a way to give your children an allowance: when the money runs out, you can choose to top up the card, just like a pay-as-you-go phone

• an easier way to spend abroad: you can load a prepaid travel card with money before your trip and spend when you go away, as an alternative to using traveller’s cheques. If you use the card abroad, make sure you check the exchange rate markup, any foreign transaction fees, ATM withdrawal fees in foreign countries and whether the card supports multiple currencies, as these vary significantly between providers and can affect how much value you actually get.

• an alternative to having a bank account: if you struggle to get a bank account or have been rejected for another type of card, a basic bank account might be a better solution.

The money put on your prepaid card is classified as electronic money, or e-money. This means it doesn’t get protection from the Financial Services Compensation Scheme (FSCS) if the prepaid card provider goes bust.

However, all prepaid card providers are required to hold your cash in a bank account ringfenced from their own operating cash. This means your money is kept separate from the provider’s business finances. But it’s important to understand that ringfencing alone doesn’t guarantee quick or straightforward access to your funds if a provider becomes insolvent.

If a prepaid card provider goes bust, recovering your money may take time. There may be delays while administrators or liquidators manage the process, and in some cases you may need to go through a formal legal claims procedure to reclaim your funds. The length of time this takes will depend on the circumstances of the insolvency. You should contact the Financial Conduct Authority (FCA), which regulates e-money providers, if you're unsure of your rights or need guidance on making a claim.

This is why it’s best not to store large amounts of money on your card. Put just the amount you need for immediate spending on it and, if you can, keep the rest in a bank or building society account that has full FSCS protection. 

If you lose your prepaid card, or notice fraudulent transactions, contact the provider as soon as possible so they can block it. Be aware that they might charge a fee for a replacement card.

If you use your prepaid card to buy goods that turn out to be faulty, a service isn’t provided, or a company goes out of business and you don’t receive what you've paid for, you might be able to make a claim for a refund under a voluntary scheme called ‘chargeback’.

You can compare prepaid cards using price comparison websites, such as MoneySavingExpertOpens in a new window, but make sure you use more than one as they don’t all have the same deals.

Take a look at your other options:

• basic bank accounts
• a simple guide to credit cards
• using and paying with debit cards.