More and more companies are launching so called ‘prepaid credit cards’. But although many of these cards can be used in the same way as a debit or credit card, the term credit is extremely misleading. There is no credit involved.

“Prepaid cards operate in exactly the same way as debit and credit cards at the Point of Sale (POS), ATM or on-line,” explains Colin Greaves, Operations Director at Newcastle Strategic Solutions. “The main difference is that rather than be linked to an account holding money or an agreed line of credit, the card owner has to prefund the amount they wish to spend on the card. Funds can be loaded onto cards through cash load networks, on-line, from bank accounts or through corporate schemes such as payroll.”

In otherwords the cards operate in the same way as a gift card/voucher or mobile phone top-up card.  There are a variety of different cards available addressing different needs. They all offer a range of benefits. The fact that they are prefunded means they are an extremely useful budgeting tool, an aspect that is extremely relevant in the current financial climate.  

“They are particularly useful for people who like to segment funds and limit spending,” says Fiona Duncan Head of Prepaid Cards at Visa. Ed Allingham Consultant, Transformation and Card Solutions Team, ea Consulting Group agrees: “They take away the fear of using credit cards or debit cards from people who do not want to risk getting into debt.”

Because no bank account is required prepaid cards are proving particularly popular with immigrants. “Prepaid cards give the benefits of plastic to the unbanked and those migrants that find it difficult to access banking facilities on entry to the UK,” says Jamie King, Director of IDT Finance. And as John Kerr, Financial Director at M-Cube points out: “The 6 million people who can’t have Bank accounts or credit cards, can use prepaid cards, addressing the important issue of social inclusion.”

Because there is no link to a bank account, prepaid cards also offer added security. If a card is lost or stolen, the cardholder's account is not compromised. As with debit and credit cards, for added security the cardholder can choose their own PIN number.

 “When applying no credit check is required, you don’t need to provide bank account details, in fact there is no link whatsoever to personal finances,” says M-Cube’s John Kerr. “This means there are also no identity theft issues, which is another important issue in today’s market place.”  

This added security makes prepaid cards ideal for purchasing online. They are also a good option for travellers looking for a secure way to carry their holiday cash. Using a  prepaid card when travelling means there is no need to carry additional ID, such as a passport if you need to change money. The cards can also be used to save a bit of money on a regular basis in advance of a holiday.

According to John Kerr of M-Cube using a prepaid card abroad is also more cost effective than using a debit or credit card. “I went to Crete and drew out 600 euros each on my debit, credit and prepaid cards, the prepaid card was the cheapest to use, as there were no bank charges.”

Both the security and budgeting aspects of the cards, mean that they are an option for teenagers. Some cards provide a safe and secure way for parents to give their children pocket money, or allow them to shop on the Internet. This aspect, has however caused some controversy in the process.

But Visa’s Fiona Duncan believes it is a good idea to give teenagers prepaid cards. “It is very important to educate children about the use of electronic money and not getting in to debt. Giving them prepaid cards helps teach them that it is actually money.”

John Kerr of M-Cube agrees: “Giving teenagers a prepaid card is only seen as a problem because people used to use the word ‘credit’. You are not giving them credit, you are giving them plastic cash. It teaches them to be more responsible, unlike cash, a plastic card also enable parents to keep track of their spending.”

When choosing a prepaid card, there are several factors to take into consideration, first and foremost charges. “The costs can vary according to the usage of the cards,” says Colin Greaves, Operations Director at Newcastle Strategic Solutions. “Some have very low costs to reflect the short term nature of the card. For example a gift card which can only be loaded once and will have a limited life, to re-loadable personal use cards which effectively allow full POS, ATM and on-line capabilities normally associated with a debit or credit card. Such cards may charge monthly fees or transaction based fees reflecting usage.”

“Ongoing costs are something you need to look at,” advises John Kerr of M-Cube. “Also look at top-up options. For example where and how you can top it up, as well as top-up fees. Many companies charge cumulative fees.”

Above all Visa’s Fiona Duncan  says: “It is really important to take into account what you want to use if for, for example will you be using it for Internet transactions, is it a one time only use you require? Look at the services you need.”

Colin Greaves agrees: “As prepaid cards have a variety of uses it is important to chose the functionality that is required. Some cards for example do not allow ATM transactions and as a consequence may be cheaper to purchase than a full POS/ATM card, this may be considered ideal if the use is primarily for say, on-line transactions.”

There are a whole variety of cards available, so make sure you know exactly what you want and what you are getting. Ultimately we could all carry a range of cards to suit different needs, whether it is to shop online, pay for our groceries or handle our holiday cash. This has already happened in Italy. “Prepaid has been phenomenally successful in Italy and a lot of people have multiple cards,” says Visa’s Fiona Duncan. “And she says every week someone comes up with new ways of using them that we hadn’t; thought of before. For example Norwich Union makes its insurance payouts on prepaid cards.”