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Pre-pay cards: do you need one?
By Hannah Ricci
As if credit, debit, mobile-phone top-up and store cards weren't enough, there's now another form of plastic jockeying for space in your wallet.
Pre-pay cards are primarily used by those with little or no credit histories who would struggle to take out more conventional forms of plastic. However, the companies behind these cards claim their use is much more wide ranging, and can be particularly useful to parents, holidaymakers and those with friends or family overseas. So are they something to add to your armoury of cards? To get an understanding of what they can do, you need to know what they are and how they work.
Explanation
The concept is much like the top-up cards used for mobile phones - you load money onto a pre-pay card to spend as normal on the high street or online, and top it up when you run out. The card acts as an account, so you can withdraw money from cash machines, pay bills and use it abroad, as well as transfer funds to other accounts and view statements. Like any other card, you have to sign the back when you receive it, and use a PIN number when making transactions.
A number of companies provide pre-pay cards and the market is growing, but the current leading names are Cashplus, Cash2Go and Speedcard, as well as Amex Travellers Cheques, Travelex and I-Money. Each one works differently, so how you reload varies - options include loading the card with cash, topping-up with a debit or credit card or transferring funds online.
Debt-proof and secure
The pre-pay card is powered by how much money you put on it, so it's impossible to get into debt. This means there's no credit check when you apply for a card. It also means they are more secure than debit or credit cards because you can only spend the amount of money you put on the card. For this reason, they are considered a good way to introduce children to money and the concept of budgeting, although this is the subject of much debate.
There are a number of pre-pay cards targeted at children. Card companies claim it is safer for parents to load pocket money onto the card rather than kids carrying cash, and that using the card to shop and save will teach kids how to manage money.
However, earlier this year, Mastercard was attacked for irresponsible advertising of its Splash pre-pay card in teenage magazines. One in Bliss stated: "Shop 'til you drop with your very own exclusive Bliss Platinum card". While children can't actually get into debt with these cards, there are concerns that they could encourage children to think they have an endless supply of money if parents continually top up the card. Janice Allen, a spokesperson for the National Consumer Council, says: "When they reach the age to have real credit and debit cards, they could already have developed bad plastic habits."
However, providing children are educated well, they can be a sensible alternative to cash.
University and gap-year finances
There are other instances where pre-pay cards can be useful, because most providers offer additional cards for the same account. For example, parents with children at university can help out financially while maintaining a degree of control, helping students to budget without the worry of them going overdrawn. And giving a pre-pay card to family or friends who are overseas makes it quick and easy to regularly transfer money to them from the UK, which is particularly handy with children taking a gap year.
Cashplus, provided by Advanced Payment Solutions, appears to be the best for this purpose because, unlike transfer services such as Western Union which charge a percentage fee of the transfer sum, there is no fee, so the amount you put on the card is the amount the other person receives. However, exchange rates still have to be taken into account and Cashplus warns that some outlets may charge a small fee to load the card.
Pre-pay cards can also be a good way to carry travel money on holiday. "Unlike debit and credit cards that charge a foreign-exchange fee of around 1.5% to 2%, Speedcard doesn't," explains Laurence Kreiger, managing director of Speedcard. "So cardholders get the actual exchange rate."
However, most other cards charge a foreign-exchange fee for ATM withdrawals and for making purchases abroad.
Charges drawback
However, while pre-pay cards are certainly flexible, the downside is that they do carry a number of hefty charges.
Take the Cashplus card provided by Advanced Payment Solutions. Basic charges include the cost of purchasing the card - £9.95 - and either a monthly subscription of £4.95 or a fee of £1 every time you use the card. There are a multitude of other charges which vary between cards, even more when they are used abroad; for withdrawing money from an ATM, topping up the card and transaction fees for purchases. Bear in mind the cost of calling customer services, as premium rate numbers, which can cost anything from 10p to 50p a minute, are commonly used.
There may be further charges hidden in the small print such as a fee for cancelling your account, replacing a lost or stolen card or renewing your account.
Many providers operate solely online and charge for ATM transactions. Some have a minimum reloading amount, while others have limited reload options - for example, you'd have to visit a branch of Barclays to top up the Speedcard with cash.
Expert view
Robert Kenley, head of cards at moneysupermarket.co.uk, doesn't believe pre-pay cards will take off for day-to-day use. "There are essentially only two niche markets for the pre-pay card as it is at the moment: the travel market - when really it should only be a back-up, not a replacement for credit or debit cards - and the financially excluded. These are people with adverse credit or who have recently arrived in the UK from abroad."
Kenley believes advances in technology will improve the concept of a pre-pay cash card. "No mainstream banks are entering this market yet, and I think this is because there are better developments on trial that will mean people won't have to pay to access their own money. The Mastercard PayPass, a free pre-pay card with a contact-less chip, allows you to pay for things by simply waving it in front of a scanner," he adds. "It's incredibly popular in America and making its way over here."
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