What Is A Prepaid Card?

What is a prepaid card?

By Matt Fernell, Editor-in-Chief at Finance.co.uk. Published 1st November 2023.

Matt Fernell

A prepaid card is a type of payment card that you can top-up before you spend, and can be used in the same way as a debit or credit card.

There are lots of names for prepaid cards, but they all do the same things. You might have heard a prepaid card called a:

  • Preloaded debit card

  • Top-up debit card

  • Pay as you go credit card

  • Everyday spending card

How do prepaid cards work?

Once you’ve found a card you want, you can apply for it online through the provider’s website. There are no credit checks required, but you might need to verify your identity and pay a one-off card fee.

When you get your prepaid card, you can add money onto it and use it like you would a debit or credit card. Some card issuers offer a virtual prepaid card as an alternative to a conventional contactless card.

Once your card is preloaded with cash, you're in control of when and how you spend your money, for example:

If you add £500 to your card, you can use it to shop online, at a restaurant, or to pay a utility bill. You can add more money to your card at any time. When you have spent the money you have loaded onto the card, you can’t spend any more so you can’t get into debt with a prepaid card. 

How do you add money to a prepaid card?

You can add money to your card in several ways:

  • With cash via one of 28,000 PayPoints

  • By transferring money directly from your bank account

  • With your debit card via your prepaid card online account

  • By phone, text or via an app

Different methods of top-up may incur a charge or fees. It is possible for other people like friends or family to transfer money to your prepaid card. 

To do this they will need the sort code, account number and reference number. If you don’t have these details, you can get them from your provider. 

How to spend with a prepaid card

A prepaid card works in the same way as a debit and credit card, so you can use it to make purchases with any business that accepts card payments. You can use it:

  • At the checkout using contactless or your personal identification number (PIN)

  • Online, by phone or mail order using your card details

  • To withdraw cash from a cash machine (there may be a fee for this)

  • To set up direct debits or standing orders to pay your bills with some prepaid cards

If the balance of your card is too low to complete a transaction, it won’t go through. For example, if you try to buy something worth £20 and you only have £15 on your prepaid card, the payment will be rejected.  

What's the difference between a prepaid, debit and credit card?

A debit card is linked to your current account and allows you to spend the money in your account and even overspend if you have an overdraft. A prepaid card will only let you spend money that's been preloaded onto the card.

Although prepaid cards are often called prepaid credit cards, they shouldn't be confused. Credit cards are a type of payment card that can help you spread the cost of purchases over a period of time, but you'll pay interest on the money you've borrowed unless you take advantage of an interest-free deal.

The other key difference is debit and credit cards are linked to your current account, and you'll need to go through a credit check to get one. You can get a prepaid card without a bank account or credit check.

How much can you load onto a prepaid card?

It depends on the card provider, and it can vary considerably. Typically, the card provider could set: 

  • A maximum top-up limit per year

  • A cap on single top-ups

  • A maximum balance that can be on your card

  • A maximum amount of cash you can withdraw each day

Top-up limits may also depend on whether they are cash deposits, bank transfers or card transactions.

How do you check the balance on a prepaid card?

The simplest way to check your balance is through your card issuer's linked smartphone app.

This should be available to download via your provider's website or the Google Play and App Store and will let you manage your prepaid card, view transactions, check your balance and upload funds.

You can also usually check your balance on:

  • Your card issuer's website

  • At an ATM

  • By text

Are prepaid cards safe?

Yes, your money is safe on a prepaid card as long as you don't lose the card. In fact, using a prepaid card is one of the best ways to protect yourself against fraud when you spend online.

If your card is stolen or lost, you can 'freeze' the card via the app to prevent it from being used. It makes sense not to store lots of money on it though, or simply choose a virtual prepaid card.

Some prepaid credit card issuers also provide consumer protection, which means if you buy faulty goods or your card is used fraudulently, you may be able to reclaim the cost on a chargeback scheme.

Prepaid travel cards can be safer than carrying around large amounts of cash abroad and more secure than using a card linked to your bank account when shopping online.

What is the Chargeback scheme?

The Chargeback scheme is a voluntary agreement that Visa, Mastercard and American Express have signed up to. It helps you to get your money back if something goes wrong.

Your card provider will reverse the transaction and go straight to the supplier or retailer's bank. The Chargeback scheme could cover you if: 

  • A purchase doesn’t arrive, is faulty, or if a service you’ve paid for isn’t provided. 

  • The company you’ve purchased goods or services from goes bust. 

  • Your card is used fraudulently.

Be aware that you’re not guaranteed to get your money back because this is a voluntary scheme.

How much do prepaid cards cost?

It depends. You can get free prepaid cards, but others will charge a monthly fee and other costs.

Pay monthly prepaid cards

This type of prepaid card will charge a monthly fee, but you'll usually pay lower transaction fees and may get cashback on your spending or other perks.

Pay monthly prepaid cards are best if you use them regularly and spend frequently.

Pay as you go prepaid cards

You'll likely pay higher transaction fees with a pay as you go card, so they're a better option if you only intend to use your card occasionally, need one for your child or for spending abroad.

Prepaid card costs can be complex and card issuers have different fees and charges, so it's worth shopping around to find the one that works out cheapest for you.

Here are some of the different charges you may encounter:

  • Set-up/Admin fees

  • Monthly fees

  • Top-up charges

  • ATM withdrawal fees

  • Foreign transaction fees

  • Non-usage charge

Can you get a prepaid card with bad credit?

Yes, you can. You don't need to be credit checked for a prepaid card in the same way as you would if you were applying for a current account or credit card. 

This is because you’re not borrowing any money, and can only spend what you have loaded onto the card. This makes prepaid cards a good option if you have bad credit and have struggled to get a credit card in the past.

You may have to go through identity checks and some card providers might look at your credit record for any evidence of fraud or money laundering, but this is rare.

Do prepaid cards affect your credit score?

Owning a prepaid card will not affect your credit score negatively, because you are not borrowing any credit. If used sensibly a prepaid card could actually help you repair your credit score.

Some prepayment cards are designed to help you rebuild your credit rating. These are really useful if you rely on prepaid cards because you have a bad credit record or can't get a bank account because you don't have proof of address or income.

If you go for a credit builder option your card issuer will 'lend' you a year's worth of monthly fees - typically around £10 a month which you would need to pay anyway.

As you pay back this 'loan' over 12 months your credit rating will start to improve and your score will build. You'll need to commit to paying the monthly fee in full and on time. You should notice an improvement in your credit rating after the first three months.

How to pick the best prepaid card

If you're planning to get a prepaid debit card or preloaded credit card, the best place to start is online because you'll find the biggest choice and best deals.

Ideally, you'll want a prepaid card with no or low fees, but take these factors into account to make sure you pick the prepaid card that's right for you.

  • Make sure you choose a prepayment card that's issued by Visa or Mastercard so it’s widely accepted. 

  • If you want a card to use on holiday, choose a prepaid card that's specially designed for travel and foreign transactions.

  • If you want a card for your children, pick a card that's tailored especially for under 18s.

  • Shop around and compare transaction fees for the types of spending you do most often.

  • Check the cost of ATM withdrawals and limits; avoid withdrawing cash if possible.

  • Check top-up charges and load maximums and find the cheapest way of topping up.

  • Look for hidden fees like inactivity penalties which may kick in after 12 months.

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.