A handy alternative to credit cards

If you have trouble getting credit, or frequently travel abroad, here's one alternative to a flexible friend that could shave pounds off your spending...

Several providers have been shouting about pre-paid cards recently. Both Newcastle building society and PayPal received awards this month for prepaid card innovation, and as more of us get caught in the credit crunch, these cards are fast becoming mainstream.

So what's all the fuss about?

Prepaid cards are traditionally seen as a useful alternative for those unable to get a credit or debit card. They work in the same way as a Visa or MasterCard, but as you pre-load the card with your own cash, you can't get into debt with one.

The downside to these cards is the charges levied by providers. Many charge you each time you pay in a shop, and all charge for withdrawing cash from an ATM. In this way, you could be throwing your money down the drain before you even start to spend.

However, things have improved in recent times, and cards such as PayPal's TopUp card are available for as little as £4.95, with no additional top-up (if via PayPal) or spending charges.

Neil Faulkner has already evaluated this and other prepaid cards, and you can read more about what's available in A prepaid card that's worth getting.

One thing to remember about prepaid cards is as you use cash to top up the card, unlike a credit card, loan or overdraft agreement, no information is exchanged with credit bureaux such as Experian or Equifax, so how you use the card has no impact on your credit rating.

If you are looking for a chance to repair your credit rating, both the Cashplus Gold and Eclipse prepaid cards give you the opportunity to strengthen your credit by entering into a special agreement with them.

However, both cards will cost you around £70 a year to run, so you have to ask yourself whether the cost is worth it. To find out more, read about the pros and cons of the Cashplus card in this article.

Prepaid for everyone

There is one other circumstance where a pre-paid card may be worth it - if you travel abroad regularly.

Unless you have a credit card which doesn't charge any fees when abroad, you'll probably already know that overseas credit and debit card charges can be extortionate.

For example, if you used your Halifax or NatWest debit cards to make a purchase overseas, not only would you be charged £1.50 and £1 for each respective transaction, but you will also be levied with a 2.75% overseas transaction fee - standard among most banks.

However, you could quickly eliminate these charges by using a prepaid travel card.

Unlike a standard prepaid card, travel cards provide much better value for money. Many cost nothing to buy, and can be pre-loaded with either dollars or euros at no additional charge.

After this, you'll usually only have to pay extra charges if you pay for goods in a currency other than the one loaded on your card.

You can also use them to make fee-free withdrawals from ATMs abroad.

Here's a small selection of available cards and what they cost:

*Rates correct as at 1pm, 19th February

If the information above isn't confusing enough, the prepaid card you choose can also affect how much you end up spending.

This is because while banks such as Nationwide peg their currency rates to Visa's wholesale rate at a certain point in the day, currency specialists such as Caxton FX and Fair FX change in line with daily movements in the interbank rate, which generally works out to be more competitive.

This means the difference between the most competitive card and the least in our table is €38 (£35). That might not sound much for £1,000. But as we all know, the savings can soon add up.

One other good thing about the Fair FX card is unlike the other providers, it doesn't charge additional fees for using your card in other currencies - including the 2.75% conversion fee.

It's also worth noting that the Caxton FX card stopped charging for ATM withdrawals on 10th July 2009.

All for one, but not for all

Despite my praise for prepaid travel cards, I would still only recommend them for people who travel regularly.

If you only intend to use it once, and find there's unused cash left on it at the end of your holiday, you will have to fork out an admin fee of around £5 to £10 to have any leftover funds put back into your bank account - which will inevitably eat into any savings you'll make.

At the end of the day, prepaid cards aren't for everyone. However, if you're someone who either has no choice but to use a prepaid card, or are looking to maximise your spending power abroad, they can quickly become a necessity for your wallet.

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