Is prepaid the best way to spend abroad?

Prepaid cards are a popular way to budget at home or abroad. They come with fewer fees than credit cards and they give the holder tight control over their budget.

Applicants don't usually need to pass credit checks, so they're also a good option for those with poor credit. They can even be used to boost credit rating.

That said, there are pitfalls. Prepaid cards lack the flexibility of travel-specific credit cards. They don't often come with the same deals and rewards. They might hit cardholders with dormancy fees.

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The best choice depends on an individual's preference and circumstance. Read on to find out which is ideal.

What are prepaid travel cards?

Prepaid cards are not credit cards. They are debit cards that are preloaded with cash - in this case, before a journey. Spending above the pre-determined limit isn't possible without topping up.

If using a multi-currency/sterling card, this money is then usually available to spend in many currencies - and, these days, the card should be able to tell where it's being used, doling out the right currency accordingly.

Other cards are single currency - less flexible, but they come with the advantage of fixed exchange rates.

The prepaid advantage

Cards that can be topped up have four main advantages over their credit and debit cousins:

1. Easy to get... and to get rid of

Most of the top "use abroad" credit cards require applicants to have a good-to-excellent credit rating. Meanwhile, some of the cheapest debit cards are only available to main current account holders, which could mean switching to get a good deal.

In short, it's a lot of hassle for those that are only going to be out of the country for a couple of weeks.

Not only are prepaid cards much easier to obtain - usually they require a permanent UK address, no credit check - but when the balance is spent cardholders have few, if any, obligations. They can just get rid of the card.

2. Fixed exchange rates

From a value for money point of view, one big advantage of a prepaid card is the fixed exchange rates that most providers offer. These are only available for single-currency cards ("euro cards" or "dollar cards" rather than "sterling cards").

With some ordinary cards (though not all), travellers have to worry about currency fluctuation.

Let's say our traveller has £500 to spend in Europe. A week before she leaves on holiday it's worth €650.

But a political or economic event makes the pound fall in value, so the day before she travels her £500 is suddenly worth just €600. Very annoying.

Of course, this also works the other way - if the euro had fallen in value, someone with a locked-in exchange rate could be kicking themselves. But this is a gamble. Many travellers prefer to rid themselves of the uncertainty and know exactly what they'll have to spend.

3. Keep safe from theft and overspending

As with all cards, losing a prepaid card means calling the provider immediately to get it blocked.

If a prepaid card is lost, most providers will replace the card for a fee of around £10 with all the card's funds intact (more on prepaid protection here).

Additionally, prepaid cards have the added benefit of not being tied to a current account or credit card, which is safer in terms of preventing ID theft as well as limiting fraudulent transactions.

Finally, going prepaid is a good protection against holiday money hangovers.

It can be hard to know how much a transaction costs in pounds abroad and it's probably not something most people want to think about too deeply on the beach anyway.

What to look for

Let's have a closer look at the features that make a good prepaid travel card.

Mobile-only?

If the convenience of an app appeals, it might be worth checking out the experts: mobile-only banks.

There are now several app-based providers of prepaid cards. They target some of their deals at people going abroad.

Monzo, Starling and Revolut are three of the top choices.

Monzo's mobile banking app

Users can still get a physical card, but it's linked to a smartphone app which (where mobile pay infrastructure allows) can also be used for transactions.

The best exchange rate

To show the difference exchange rates can make, let's compare two leading prepaid cards for use abroad.

Here's the difference between their rates and buying foreign currency online before a trip from the Post Office (rates checked the day we last updated this article).

Looked at pound by pound, it doesn't seem like a big difference. But those spending £1,000 while they're abroad could gain or lose around £100 - a family meal out, or a fair few jugs of sangria!

Fewest fees

Alongside the rate, it's important for cardholders to look at which deal will land them with the fewest fees. This will depend on how they plan to top up and spend using the card.

The main categories of fees are:

• Topping up: usually free by bank transfer, phone call or text - but this is worth checking for those with a preferred method.
• Spending: Most prepaid travel cards don't charge fees for transactions abroad, so think carefully before choosing one that does, whether it's a flat rate or a percentage of the amount being spent. That said, many cards will charge fees for spending in the UK - so it might be worth being conservative with the top-ups.
• ATM withdrawals: Again, there are lots of prepaid travel cards that don't charge for taking cash out of a machine. Some, though, charge a percentage or a flat fee
• Dormancy fees: Some cards levy a charge if they're left dormant for a certain period - often 12 months. Find more information on dormancy fees here.

Best deals

Although not as generous as credit card providers, prepaid cards sometimes come with offers like cashback or discounts at certain retailers. Check the provider's site.

Refund policies

Most cards will allow customers to get their remaining balance refunded after a trip. But there are usually fees involved - generally around £5.

Best currency option

As we've mentioned, most prepaid card providers offer a 'Euro' card, a 'US Dollar' card and a 'sterling/spend anywhere' card.

Single currency cards generally have the fewest fees and seem less likely to charge for the card upfront so, unless a cardholder is intending to spend in several currencies, they're probably the best option.

Example currency cards

Here are a few cards currently on the market:

Do they beat 'use abroad'?

For all that prepaid cards are good value, however, they don't necessarily beat the best standard cards out there.

We have a whole guide on the best cards advertised to holidaymakers so take a look to see exactly what we mean.

Briefly, though, here are three advantages standard foreign-use cards have over prepaid:

1. Fewer limits on spending

A cap on holiday spending might be appealing to some but, on the other hand, some people might prefer to know that they'll always have enough cash - no matter how many unexpected costs come up when they're away.

Of course, if spending on a credit card, they'll still need to limit spending to the point where it's possible to pay off the balance in full to avoid paying interest.

2. Section 75 protection (credit cards)

This handy bit of consumer law which covers credit cards applies to purchases abroad too.

Find out more in our full guide.

3. Travel extras

As well as 0% non-sterling transaction fees on use abroad many travel targeted credit cards also offer extras such as insurance or reward points. Check out the guide above for more information.

Clarification

Let's be clear at this point, what we're talking about here are good, traveller-targeted credit and debit cards.

The problem many of us face is that our standard debit cards are offering some of the UK's very worst fees for spending abroad.

For example, one leading bank's debit card charges £1.50 for each transaction abroad, plus a non-sterling transaction fee amounting to 2.75%.

Prepaid cards may not always be top of the market - but they should be better than that.

Conclusion

As with many financial matters, the best option for spending abroad will depend on circumstance.

And, of course, spending money is only one of the financial considerations when making a trip abroad. It's also important to think about travel insurance, the best way to collect air miles and so on. With a little forward planning, travellers can end up with much better deals on their holidays.

Bon voyage!