Everyday prepaid cards provide a simple way to make payments and manage your finances.
What are everyday prepaid cards?
Prepaid cards are the chameleons of personal finance. They can be currency cards, business expense cards, pocket money cards, gift cards, or even credit builders. However, although they enable the development of various speciality cards, prepaid cards are also a great tool for straightforward 'everyday' money management.
Everyday prepaid cards operate in a very similar manner to the standard debit cards offered with most current accounts. They can be used for purchasing directly, for withdrawing money from ATMs, and are protected by the security features debit cards use (chip and pin and secure online verification).
How do everyday prepaid cards work?
Prepaid cards leave little to the imagination - you can only spend money with them that you have prepaid to your card issuer.
There are a variety of ways that you can top up most cards, including:
Debit/credit card transfer
Post office counters
Once your card has been loaded with money, you are free to spend/withdraw as you would with bank debit card, so long as you do not exceed your balance.
Something to bear in mind though is that most transactions with prepaid cards incur a fee (they aren't making money through high rate overdrafts), and these fees are deducted from your balance as you use your card. In other words, having £100 on your card doesn't mean you can withdraw £100 from an ATM. Assuming fees of £3, you'll only be able to withdraw £90 (because ATMs will not give you the £7 difference). That doesn't mean you lose the unspent money, but you will need to top-up your card again to withdraw it, or use your card directly in a store for an amount not greater than the balance minus any transaction fees.
What fees do everyday prepaid cards charge?
Perhaps, a better question is what do they not charge for - which is practically nothing. Prepaid card providers don't make money through interest charges, as most banks do, so they tend to link customer charges to those that they incur for transactions.
In many respects, this is a more honest approach to banking and a step towards the transparency that regulators desire, and which banks would be happy to supply if people understood that nothing is free - someone, somewhere always pays.
Setup fees - If you open an account with a prepaid card supplier they incur admin costs, and of course, they incur additional expense in producing and mailing cards to customers, so most charge a setup fee. If they don't, it is likely that they have increased other charges to compensate.
Top up fees - In the real (not 'free banking') world there are charges associated with banking transactions. We don't tend to see them, but bank transfers, credit/debit cards, even cheques incur processing and infrastructure licencing costs. Different methods of transferring money to your account cost prepaid issuers different amounts, so fees for topping up tend to vary depending on the method you choose. That said, it is often the case that at least one 'free' method for topping up accounts is retained - to encourage people to use their cards.
Transaction fees - Transaction fees (other than for those in a foreign currency) are one of the few areas where prepaid issuers can make money. This is because merchants (businesses accepting payment cards) are charged something called ‘interchange’ every time they accept a card payment (this is the reason why some smaller shops impose a minimum transaction value on card sales). As such, many prepaid card suppliers offer transactions for free.
ATM - Unlike direct transactions, ATM providers charge banks/prepaid suppliers for transactions - It costs a lot of money to provide the technology and supply the money needed for ATMs to work, so it is not surprising. Fees vary from card to card but are usually around £1.
Monthly fees - Not all prepaid card providers charge monthly fees, and when they do they tend to offer free or reduced rates on Setup/Top up/ATM fees. Whether it is worth paying monthly fees to reduce the fees you'd incur through standard pricing depends on your card use.
What are the advantages of everyday prepaid cards?
Prepaid cards offer a simple platform to manage your finances, with a transparent fee structure, but many also offer additional benefits that can be very useful depending on your circumstances. These include:
Some prepaid card providers offer their users cashback and/or discounts in particular stores.
Since prepaid card suppliers do not offer credit as standard, you should not be able to have a negative balance, therefore you will not incur interest. However, although in theory you cannot have a negative balance on a prepaid card, it does happen from time to time - when multiple transactions are completed in quick succession. However, although you'll avoid interest if this occurs, the money must be repaid.
Some pay-monthly prepaid cards offer a credit building facility, where your monthly fees are reported back to the credit reference agencies as positive loan repayments. As you demonstrate regular repayments over time, your credit score should (depending on what else you are doing financially) improve. It is worth noting that you will need to have specifically applied the credit building functionality on your card, as it is not turned on as standard.
Bank account functionality
Although not all prepaid cards offer this, many now enable the processing of direct debits and transfers directly into your account via an account number and sort code, just like a conventional bank. This means you can have your wages paid directly into your account, and you can use your card to access the discounted rates often available from utility companies for customers paying by direct debit.