Prepaid credit cards can be a great way to budget, but are they the right option for you? We’ve got the info you need to help you decide.
The concept of a prepaid card might seem a bit pointless to some, but there are benefits to using them. For that reason, they’re definitely worth looking into – particularly if you struggle a bit with keeping to a budget.
Not only do prepaid cards help you have more control over your finances, but they can even help increase your bank balance by making saving cash less challenging.
However, they’re certainly not for everyone. Unlike credit cards, prepaid cards don’t offer many perks to those who are already good with money, so it’s important to do your research and weigh up your options before deciding which option to go for.
How do prepaid cards work?
Prepaid cards work in exactly the same way as any debit or credit card, and are accepted as payment virtually everywhere: online, in stores, restaurants, bars – you name it. You can even use a prepaid card to withdraw cash at an ATM if you need to (although some will charge you for this).
The key difference between a prepaid card and a regular credit or debit card is that with a prepaid, when your balance hits zero there’s no overdraft or credit available.
Although this can be annoying, the major bonus is that you’ll never have any interest to pay back and no charges to catch you out if you go over your overdraft limit (because, of course, you don’t have an overdraft). With a prepaid card, you can only spend what you have preloaded or transferred onto the card.
As for actually topping up a prepaid card, you can do this with cash, by phone, online, text or with an app – depending on the kind of card that you have. Just be aware that there can be additional fees involved depending on the card’s terms and how you choose to top up.
You can always check your balance online, and some of the latest prepaid card technology gives you instant updates and notifications to your smartphone, letting you know exactly how much you’re spending and where.
Free prepaid cards
It’s not uncommon for companies to offer new customers a prepaid Mastercard as a reward for signing up or buying a product from them.
This is particularly common among utilities companies, like broadband providers, and the values can often reach as high as £100, if not more!
We’re always on the lookout for offers that come with prepaid cards, so head over to our deals section to see if there are any going at the moment!
App-only prepaid cards
In the last few years, a few app-only prepaid cards have emerged that are hosted by small fintech (financial technology) startups.
However, most of these companies have since gone on to become fully-fledged banks, meaning we can’t technically include them in this guide to prepaid cards.
That said, there’s nothing to stop you using a normal bank account as a prepaid card. App-based banks in particular are ripe for use as a prepaid card, as most of them started off that way anyway.
This means they usually have all the technology that made app-based prepaid cards so appealing in the first place – we’re talking live spending updates, digestible breakdowns of your spending and budgeting help.
Should you get a prepaid card?
It’s tempting to suggest that every student should give prepaid cards a go – but they’re definitely more useful for some than others.
We’d recommend you consider a prepaid credit card if one (or more) or these six situations applies to you:
You struggle to budget
Prepaid credit cards are perfect for anyone who struggles to stay within budget each month, because you have no choice but to oblige! There’s no overdraft or extra money at the bottom of a prepaid card, so you need to keep on top of your finances.
Assign yourself a weekly or monthly budget and pop that money on your card to use for everyday costs. This will encourage you to really think about what you’re spending day to day.
Unsure how much your weekly budget should be? Our handy budgeting spreadsheet will help you crunch the numbers!
You have a bad credit rating
Most prepaid cards come with a guaranteed acceptance rate, which is great for students who have been declined for a credit card in the past. Being rejected for a credit card will put a ‘footprint’ on your credit report and potentially lead to you being rejected for things like loans and contracts).
Not only this, but prepaid cards can actually help improve your credit rating. Certain cards allow you to pay in a certain amount each month, and if you make all the payments successfully, they share the details with a credit report company on your behalf, thus bringing your rating up.
You’re an international student
Unfortunately, the terms for student bank accounts for international students tend to leave much to be desired. For example, if you’re an international student, you’re unlikely to get a 0% overdraft, meaning charges can occur if you ever end up in the red.
Having a prepaid card can be perfect for international students, as banks are happy to dish them out on the basis that you’ll only be spending your own money. Some cards even allow family members to top the card up from abroad, should you need some financial support or emergency cash.
Your parents are involved in your finances
If your parents are worried that you’re not ready for a full blown credit card, or you’re keen to demonstrate that you don’t rinse all your cash on clothes and beer, this is your chance!
Your parents can have access to your spending, and perhaps agree to top your card up a certain amount each month (they are technically expected to help out financially, after all).
You’re worried about going too heavily into your overdraft
If you tend to end up so far into your overdraft that you’re constantly teetering on the edge of your limit, a prepaid card is a great way to teach yourself to stay within budget.
Some prepaid cards will send you a notification when you’re onto your last few pennies, so you’re not left red-faced at the supermarket checkout when your card gets declined buying toilet paper.
You go abroad quite often
Prepaid credit cards can be handy for travelling abroad – especially as you’ll only have a certain amount on the card at one time, so don’t have to worry as much about your card being stolen and maxed out.
What’s more, prepaid cards often have much better exchange rates than standard debit or credit cards, and can even let you withdraw cash abroad for free.
Prepaid cards versus credit cards
It’s worth being aware that in some circumstances, a credit card will actually work out as a better option. This is because, unlike prepaid cards, credit cards can come with lots of added bonuses and perks for those who are already well-off or good at handling their money.
In essence, if you’re good at handling your money and paying up for things on time, you’d be better off reaping the benefits of a credit card.
The main noticeable differences between a credit card and a prepaid are:
- You can only spend whatever money you put onto a prepaid card, whereas a credit card allows you to borrow extra cash (on which you usually have to pay a bit of interest if you don’t repay in full each month – although 0% credit cards are fairly common too)
- Credit cards are the easiest way to build a good credit rating (if you’re on time with repayments!), whereas prepaid cards can’t generally be used for that (apart from some which allow you to pay for your details to be shared with credit companies – but this option is better for people who already have a bad credit rating).
- Whenever you pay for something over £100 with a credit card, you’re automatically insured thanks to Section 75 Protection. Prepaid card don’t have that security
- Most credit cards nowadays have heaps of perks such as reward points, cashback options and air miles. You won’t see any of these on prepaid cards (although cashback is sometimes available).
The important thing to remember is that you should only go for a credit card if you know you’re pretty disciplined when it comes to spending.
Are there any drawbacks?
There are a couple of potential drawbacks involved with using prepaid cards, and it’s important to be aware of them before you go making any decisions.
First up, there is a potential security risk involved that, although unlikely, is worth noting!
Essentially, the nature of prepaid cards means that they’re not owned and run by banks. They’re what’s called an ‘electronic money product’, and when you put your money onto your prepaid card it’s stored with a payment processing company rather than a bank.
Therefore, if that payment processing company were to go bust, you’d lose your cash.
For this reason, it’s really important that you only pay onto your card in small-ish doses. We’d recommend topping up once a week (most of the cards mentioned below don’t charge for top-ups anyway, so this won’t leave you out of pocket) – that way, if the company goes bust, you’re not likely lose out on a lot of cash.
This is sort of how prepaid cards are supposed to work, anyway: you pay in a small weekly or monthly budget and work through that until you’re ready for the next instalment.
The other main drawback with prepaid cards is the fees. Here’s a breakdown of the different charges that could be applied, and what they’re for:
- Application fee – As you can imagine, this is just a sort of admin fee for processing your application. This can be anything up to £10, but more often than not this process should be free
- Monthly fees – Like many bank accounts (though not student accounts), some prepaids charge you a small monthly fee. It’s never normally more than £5, but it’s still something to consider
- Transaction fee – Some cards charge a fee for each time you make a payment
- Renewal fee – As with most credit cards, prepaids need to be renewed every three years. Sometimes there’s a small price of around a fiver, but if you top up enough this can sometimes be waived
- Inactivity fee – Try not to let your card sit totally unused for months, as sometimes they’ll charge a small monthly fee as a slap on the wrist for not spending.
The best prepaid cards
Before we run through the best prepaid cards, it’s worth reiterating what we said earlier about app-based banks. Although they’re not technically prepaid cards, many of them used to be, and as such are great candidates to be used as a prepaid card.
Check out our guide to the best app banks for our rundown of the main players, including Monzo, Revolut and Starling.
Anyway, in no particular order, here are the best prepaid cards!
Pros: 99p application fee; free to top up by bank transfer; cashback available; well received app.
Cons: 99p charge for cash withdrawals; 99p charge for topping up with cash; 99p charge if you spend less than £500 in a month; expensive to use abroad.
Pockit has a low application fee of 99p, guaranteed acceptance rates, no top-up fees via bank transfer, and no transaction fees.
And as there’s no minimum contract, you can cancel at any time without penalty.
You can also download the free Pockit app for your phone. It’s incredibly well reviewed, and also gives you real-time updates on your incomings and outgoings.
The real selling point of Pockit, though, is that it offers cashback on purchases at a whole range of retailers. The list includes a ton of big name brands, such as Pizza Express, Café Rouge, Argos, M&S and New Look!
However, we wouldn’t recommend you even think about using this card abroad. They charge a whopping 4% foreign exchange fee and £2.25 every time you withdraw cash abroad!
It’s also worth mentioning that we’ve heard very mixed reviews about Pockit, and the general consensus is that their customer service is pretty slow and unhelpful.
Pros: No fees for spending in the UK; free to top up by debit card, standing order and bank transfer; no monthly fee.
Cons: £5 application fee; £1.50 charge for topping up with cash; 2.95% charge for cash withdrawal; 2.75% transaction fee abroad; poorly reviewed app.
Optimum is a bit of a no-frills option, but it does what you’d want from a prepaid card – and you can’t ask for much more than that, really!
It’s free to use the Optimum card, and free to top it up, too (if you’re doing so via a debit card, standing order or bank transfer – if you’re doing so with cash or via a credit card, you’ll have to pay).
That said, you do have to pay a £5 application fee to get the card, and the ATM withdrawal fees will really start to add up if you regularly take out cash.
What’s more, like Pockit, the charges for using Optimum abroad are too high to realistically consider this a good option for spending on your holidays.
And as for the myOptimum app, it looks very outdated and users report that it’s incredibly clunky to use.
Pros: Application and card are free; free card transactions; free top up by bank transfer; free plan available; cashback available.
Cons: Free plan charges for things like direct debits and cash withdrawals; 3% charge for topping up with PayPoint; minimum 3% charge on foreign transactions and ATM withdrawals.
The ‘U’ in ‘U Account’ stands for ‘Unbank’. Make of that what you will, but U Accounts are certainly marketed at young people.
There are three levels of pricing for a U Account: free, £5/month and £10/month. As you might expect, while the free account is technically free, you end up paying extra for direct debits and cash withdrawals. For that reason, it’s worth taking a look at the pricing list and deciding if a paid account would be cheaper, based on what you’ll use the card for.
Nonetheless, the card is absolutely free no matter what plan you apply for – as are UK-based card transactions. What’s more, there’s cashback available at a whole host of retailers and restaurants.
Arguably the biggest selling point of a U Account, though, is the app. It’s nicely designed, well reviewed and comes with some handy features like being able to check your PIN and lock/unlock your card.
As with most of these cards, the charges for using the card abroad aren’t great – 3% on foreign transactions, and 3% (plus £1 on free accounts and 50p on a £5/month plan) for cash withdrawals abroad.
Pros: Cashback available; free purchase protection; can build credit rating; mostly free top-ups.
Cons: ATM withdrawal charge; £5.95 application fee; monthly fee; can harm your credit score if you miss payments.
If you’re planning on making a big purchase such as a holiday, the Cashplus prepaid card offers free purchase protection in case a company goes bust.
It’s free to top up by bank transfer or through a standing order. You can also top up cash at the Post Office, with the first £1,000 per month free of charge and a 0.25% fee applying thereafter.
Cashplus also offers cashback whenever you buy something online through the Cashplus cashback site, featuring retailers including Boots, Tesco and M&S.
What makes Cashplus stand out, however, is its CreditBuilder feature, which allows you to work on improving your credit rating.
Basically, it works by them “loaning” you a lump sum of around £71.40 (12 times the monthly fee of £5.95). To clarify, you do not get the £71.40 credited or in cash, as it’s a ‘virtual’ loan.
Each month you repay £5.95, and if done on time, this helps to build your credit score. However, you must make every payment on time. Missing a payment will adversely affect your credit rating, as Cashplus report the payments back to credit agencies to appear on your credit file.
Five tips when using prepaid cards
Here are five simple steps to help you reap the benefits of your prepaid cards:
- Set up a weekly or monthly direct debit from your main account to set your budget and prevent overspending. Over time, you’ll get used to spending the same amount every week, and it’ll get much easier to stay within limits
- Decide now if the prepaid card is going to be for all your expenses (so rent and bills too) or just for weekly spending to cover food, books, printer credit and toilet rolls, etc.
- If you have generous parents who are happy to offer you some financial support at uni (as the government recommends), arrange for them to load any money they’re kindly donating to your cause directly onto your card
- Always keep track of any monthly fees or transaction fees that come with your card. If you find you’re getting too many little charges here and there or you’re not not using your card enough, cancel your account to avoid any ongoing charges.
- Zero balance really does mean zero balance on these cards, so watch what you spend! You should find over time that you really improve on your budgeting skills.
Are you sure you’re getting the best deal on your current account? Check out our guide to the best student bank accounts – if you spy a better deal, get switching!