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On the high street, a prepaid card is indistinguishable from any credit or debit card.

Just as with those deals they can be used wherever the issuer - Visa, Mastercard or Maestro - is accepted and work with chip and PIN or online.

There's one big difference, however.

How prepaid cards work

A prepaid card doesn't have a credit facility as is the case with a credit card or even a debit card attached to a current account overdraft.

Instead, cardholders can only spend the money they've loaded onto the card in advance.

Cardholders can usually top up via bank transfer, with a debit or credit card, at a post office or with a participating retailer.

Most prepaid card providers make money by asking cardholders to pay for those various methods of loading money on to the cards.

Alternatively, or as well as, they take a fee when the cardholder uses the card for spending or to take out cash. A few prepaid cards charge fewer fees and instead ask for a flat monthly fee for holding the account.

See this page for a full comparison of currently available prepaid cards.

Why get a prepaid card?

Loading is a pain and paying is certainly painful compared to free-to-use debit cards. So why go prepaid?

Safety

Not having a credit facility makes prepaid cards a safer way to spend.

Cardholders can set money aside for particular uses - spending at the sales, for example - and by limiting themselves to a certain amount beforehand, can't give in to the temptation to splurge.

For that reason, and since they're accepted worldwide, prepaid cards can also be particularly good for holiday spending.

In addition, the cards are safer since new rules on e-money implemented in May 2011 made it more difficult for prepaid providers to refuse to refund cash loaded on to a card.

Poor history options

Because prepaid cards are not a form of borrowing, there are no credit checks to hold one.

For that reason, they're popular with some consumers who have a very poor credit history, including bankruptcies.

However, the Government has criticised prepaid cards in the past. Because of their fees, they're a poor option for those claiming benefits, ministers said.

These consumers should note, however, that cheaper, basic bank accounts with free debit cards may also be available to them through major banks and building societies.

Some prepaid cards also offer a credit builder facility though, which works like a very small loan and appears as positively repaid borrowing on a credit report.

Under-16 card options

Some cards have minimal age restrictions and are available to children as young as 13 years.

In some cases, however, providers only offer prepaid cards to younger users as an additional card to an account taken out by someone aged 18 or over such as a parent or guardian.

Prepaid cards can be seen as a way to teach youngsters how to manage their money effectively and it's safer than carrying cash.

And there is also a very good case that allowing teenagers to have a secondary card, without a credit option, on an adult's account is useful in case of emergencies.

Fees and charges

As we noted above, prepaid providers aren't issuing cards out of the kindness of their hearts.

Here's a selection of some of the fees to look out for:

• Initial application fee - ranges from £5.00 to £10.00.
• Reload fee - a charge for putting more cash on the card. Typically 1.95% but can be as high as 3%, or as low as zero. Tends to vary between top-up method as well as card provider.
• Purchase fee and/or monthly fee - some prepaid cards will charge for each and every transaction or they may charge a set amount each month (see below for more on this).
• ATM Fee - the charge for withdrawing cash via an ATM.
• Foreign Transaction Fee - a percentage of each transaction abroad, typically 2.75%. Cards designed specifically for use abroad e.g. a Euro or Dollar based travel card may not have this charge when spending in Euros or Dollars.
• Re-issue fee - when the card reaches its expiry date, rather than automatically being sent out a new one as is the case with credit or debit cards, cardholders may be charged for another card to be issued.

Monthly fees and initial fees are applicable to some accounts: there are two basic types of prepaid credit card - pay monthly and pay as you go.

For the first type, cardholders pay a monthly fee for using the card, typically around the £4.99 mark, but no fees on purchases that they make in the UK. There's usually a foreign transaction fee.

For example:

• ExtremeCred - £8.95 to buy card then £1 a month to hold. Free to use, about 70p to top-up.
• CardOneBanking - Free card then £12.95 a month. Free to top-up and use aside from £1 ATM fee.

With PAYG prepaid cards there's no monthly fee but cardholders usually pay a fee for every purchase that they make.

This fee is typically around 2.95%, and additional charges may be added on top for purchases outside of the UK as well as ATM withdrawals.

For example:

• Travelex Cash Passport - Free to get and use but 2% fee to load and minimum top-up £100.
• Virgin Travel Money - Free to get and top up with debit card but ATM fee of 1.5 Euro or 2 USD.

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