Prepaid current accounts are comparable to conventional bank accounts, in that they offer everyday banking facilities such as a debit card, direct debits, standing orders, and the ability to pay money in to your account. You can also take money out of a prepaid account – using an ATM, anyway.
The main differences with prepaid cards is that they are mostly managed online, there are no credit checks in order to be eligible, there are sometimes (though not always) monthly fees and other account fees, there are generally no overdrafts available, and there is no interest paid on in-credit balances.
There are other differences between prepaid and conventional bank accounts, but these are not always negative, and prepaid bank accounts may be the solution if you can’t (or don’t want to) use more conventional forms of banking.
As there is no credit check in order to be eligible for a prepaid current account, anyone who is aged 18 or over (sometimes 16 or over, depending on the account) and a UK resident will be guaranteed to be accepted.
Your application for a prepaid account can be easily done online with a simple form. Once completed, and you have paid the setup fee if there is one, you could receive your sort code and account number immediately. Your card will be sent out separately and will usually arrive within a few days.
There are many reasons why you would want a prepaid bank account, including:
If your credit history is far from perfect (you have been declared bankrupt, or have CCJs against your name) and you cannot access other forms of more traditional banking.
If you don’t have a credit history at all (perhaps you are new to the UK), and feel that you wouldn’t be eligible for a more conventional bank account.
If you wish to proactively improve your credit rating.
If you want to separate your funds from a conventional current account, a prepaid account is a very good choice.
If you want to know exactly how much you are being charged for banking services (prepaid bank accounts are more transparent with their charges).
If you need more help with sorting out your day-to-day finances than traditional banks offer.
Most prepaid current accounts charge a setup fee or a monthly fee for their services, sometimes both. This is not always the case, but you will often find that ‘free’ prepaid current accounts will have costlier charges for other banking services. All prepaid current accounts have their own unique charging system, but unlike more traditional banks these are much more transparent and clearly listed from the outset.
Beyond the mandatory charges, you can be charged fees for the following:
Transactions, when you make purchases with your debit card
ATMs, when you take cash out of a cash machine
Cash withdrawals, at bank or Post Office counters
Payments into your account
Payments out of your account, such as direct debits and standing orders
Unpaid direct debit fees
Extra accounts, for saving or budgeting
Extra cards or replacement cards
Foreign use of your card, both at ATMs and on purchases
Inbound international payments
Dormancy, if there has been no activity on your account for a specific period of time
Cancellation, where you need a refund of the cash value in the account
Yes. Because the prepaid market has boomed in recent years, there is fierce competition by prepaid issuers to gain new customers, and as such many accounts offer such perks as:
Cashback – This is usually limited to a number of retailers, and varies from account to account, but can be up to as much as 10%.
Money management tools – Easy-to-use real-time apps for budgeting, and separate accounts for paying bills or saving. Prepaid bank accounts can really help you to see what you spend your money on, and to budget for the present and save for the future.
Account alerts – Set up balance or payment notifications to ensure that you don’t miss a payment.
Credit building facility – With some cards, the monthly fee you pay can be treated like a loan by the issuer, and your successful regular repayments are reported back to the credit reference agencies. This can help to prove your creditworthiness and over time it can actively help to build or rebuild your credit rating.
Most of the perceived disadvantages of prepaid bank accounts could be counted amongst their advantages, depending on your point of view. However, there is one undeniable disadvantage that prepaid accounts have in comparison to traditional bank accounts.
Because prepaid current account issuers are not banks in the traditional sense, but are known as Authorised Payment Institutions (APIs), any balances held on prepaid cards are not covered by the FSCS – the Financial Services Compensation Scheme. That means, if your prepaid issuer goes bankrupt, you could lose your card balance. Some prepaid current account issuers do ring-fence balances so that they remain entirely separate from their other funds as a precaution. While this reduces the risk, it does not eliminate it completely. If this is a concern for you, a conventional basic bank account may be more suitable.
Before choosing a prepaid current account, you should really consider your own personal spending habits – for example, will you just pay in your wages and take it out in cash, or do you want to mainly shop online or in-store with your debit card?
You should also think about what you want to get out of your prepaid account. Is your main concern to build up your credit rating? Pay the least amount possible per month? Pay the least amount possible for your specific banking needs? Gain access to the valuable cashback deals? Whichever you are looking for, the UK prepaid market undoubtedly has a suitable account.