Prepaid cards vs debit cards vs credit cards

When you open a UK bank account, you’ll automatically receive a debit card. This will be issued by one of four payment processing networks: Mastercard, Visa, Maestro or Electron.

If you’re over the age of 18, you also have the option to apply for a credit card — either with your bank or another provider. Mastercard and Visa also issue these, as do American Express. But as the world becomes more globalised, you’ll see other names like Discover and JCB on credit cards too.

Then there are prepaid cards, which, again, are issued by Mastercard, Visa, American Express and Discover.

But what’s the difference between prepaid cards, debit cards and credit cards? And how do you know which one is right for you? In this article, we’ll explain how these different types of cards compare and how each one can be used.

How do prepaid cards compare to debit cards and credit cards?

A prepaid card is a physical or virtual card that you load money onto to make purchases. A debit card makes purchases by deducting money directly from the bank account it’s connected to and money spent on a credit card belongs to a bank or other provider.

Some benefits of using a prepaid card over a credit or debit card are that you don’t need to have a bank account to use one, there’s no impact on your credit score and they’re ideal for budgeting as you can only spend what’s on the card.

Continue reading to find out more about how these different types of cards work.

What is a prepaid card?

Like a gift card, a prepaid card is a physical or virtual card that you can load money onto and then make purchases or ATM withdrawals. The funds aren’t linked to a bank account, so you can only spend the amount that’s been loaded onto the card. Depending on your provider, there are several ways in which you can top up a prepaid card:

• Online — Sign into your prepaid card account and use a debit card to transfer money
• Pay in cash — Use a PayPoint service at a post office, bank, shop or petrol station and load your card using cash
• Send bank transfers — Transfer money from your bank account using your prepaid card’s sort code and account number
• Receive bank transfers — Receive money on your prepaid card from someone else

These types of cards are often used by businesses as gifts and rewards, but they’re also useful for people who have limited banking options or those with limited budgets.

Prepaid cards take many different forms and are used in various ways, from travel purposes to business use. Here are some of the different types of prepaid cards you can get:

• A prepaid debit card or general-purpose reloadable prepaid card — Can be used perpetually, in the same way as a traditional debit card
• Gift card — Designed to be used once and can’t be reloaded
• Payroll card or government benefit card — Usually reloadable and acts as an alternative to cheques and direct deposits into a current account
• Transport card — Reloadable and can only be used to pay for travel fares
• Travel card — Works like a prepaid debit card, but allows you to reload with multiple currencies
• Student card — Reloadable but can usually only be used on campus
• Incentive card — Can be reloadable or for one-time use and is usually used by businesses to reward employees and gift clients and customers
• Business card — Used by companies in place of a corporate credit or debit card

What are the advantages of a prepaid card?

There are multiple benefits of using a prepaid card instead of credit or debit cards:

• You don’t need to have a bank account to use one
• When you apply, you won’t be subject to credit checks, so it doesn’t matter if you have a low credit score
• They’re ideal for budgeting as you can only spend what’s on the card, meaning there’s no risk of overdraft or credit card fees
• With a prepaid travel card, you can avoid currency exchange rate fees
• Your wages can be paid directly onto your prepaid card
• Virtual prepaid cards are better for the environment

What is a debit card?

A debit card is a type of payment card that’s connected to a bank (with the exception of prepaid debit cards). This means that when a payment is made, the money is deducted directly from a current account.

With a debit card, you can withdraw money from ATMs and make online, telephone or in-store purchases. When making a purchase in person, you also have the option to get cashback at the till which saves you from having to go to an ATM.

Debit cards don’t usually incur fees for spending unless you spend more than you have in your account and have to pay an overdraft fee.

How does a debit card compare to a prepaid card?

While prepaid cards may sometimes look and act like debit cards, there are some considerable differences between the two.

As explained above, when a purchase is made, the money used to make the purchase is sourced from different places.

There are some notable cons of using a debit card that don’t apply to prepaid cards:

• While they are convenient, in some cases they may be too convenient, as they’re connected to your bank account, meaning you have the ability to spend all of the money in that account
• If you have an overdraft facility, there are potential overdraft fees and you risk getting into debt you can’t afford to pay off
• Using a debit card can have a negative impact on your credit score
• Some banks charge you for holding a current account with them
• If you withdraw money from a foreign ATM, you may have to pay a withdrawal fee

What is a credit card?

While you can get a credit card from your existing bank — as well as other providers — your card isn’t linked to your current account, and any money you spend on it will be borrowed from the financial institution, rather than belonging to you.

When your credit card is issued, you’ll be given a credit limit based on your credit score and other factors, like your income and assets. This means you can spend up to a certain amount on that card, and you’ll be able to spend up to this amount regularly, provided you make your minimum card payments on time. When you carry any remaining balance over to the next month, you’ll have to pay interest on the balance until it’s paid off.

Your credit limit can be increased or decreased depending on how you’re spending the money, and this can be done either by your credit card issuer or requested by you, which they will then approve or deny.

Some credit cards offer perks and rewards when you spend on them, such as Airmiles, airport lounge access, concierge services, and special event access.

How does a credit card compare to a prepaid card?

Although credit cards and prepaid cards are accepted in many of the same places, they’re total opposites when it comes to where they source money from to make purchases. With a credit card, you’re spending money you don’t have, whereas this is impossible with a prepaid card, as you can only spend what’s been preloaded onto it.

This means credit cards are much riskier than prepaid cards — and they have several other disadvantages too:

• They come with lots of charges, such as annual fees, late payment fees, over-limit fees, cash advance fees, foreign transaction fees, returned-payment fees and monthly interest on outstanding balances
• Using a credit card can have a negative impact on your credit score if you miss payments, make late payments or max it out
• If you struggle to control your spending, you risk getting into debt you can’t afford to pay off

How do I know which card is right for me?

Which card is best for you comes down to your financial situation, how you handle your money and which features you’ll benefit from the most.

Credit cards are great for those who are good with money and aren’t tempted to spend what they can’t afford to pay back. If you’re sure you’ll be able to pay back your entire balance each month, a credit card is a good way to benefit from perks and rewards like Airmiles and event access, as well as build your credit score. However, not everyone will qualify for a credit card.

Debit cards are a convenient way to make purchases without having access to more credit than you can afford — unless you have an overdraft facility, that is. Even if you don’t have an overdraft, there’s still the danger you could spend everything you have in your account without realising it. This means they share some of the same risks as a credit card, but don’t come with any of the perks and rewards.

Prepaid cards are the only way to be one hundred per cent sure you’re only spending what you can afford, so if you’re on a budget, they’re the obvious choice for you. They’re also the way to go for those who don’t qualify for a traditional bank account or credit card.

Because each of these cards can be used in different ways and comes with its own unique benefits, many people decide to have two, or all three, of these cards, which they can use for different types of spending.

Summary

There are three main types of payment cards in the UK: Prepaid, credit and debit cards.

A prepaid card is a physical or virtual card that you can load money onto and then make purchases or ATM withdrawals. The funds aren’t linked to a bank account, so you can only spend the amount that’s been loaded onto the card. Some of the benefits of a prepaid card are that you don’t need to have a bank account to use one, they have no impact on your credit score and they’re ideal for budgeting, as you can only spend what’s on the card.

A debit card is connected to a bank, which means that when a payment is made, the money is deducted directly from a current account. With a debit card, you can withdraw money from ATMs and make purchases. Some of the cons of using a debit card are that you risk spending all of the money you have in your bank account, you may incur overdraft and other fees and using a debit card can have a negative impact on your credit score.

A credit card isn’t linked to your current account, and any money you spend on it will be borrowed from the financial provider, rather than belonging to you. Credit cards are much riskier than prepaid cards as they come with lots of charges, they can have a negative impact on your credit score and if you struggle to control your spending, there’s the danger of getting into debt you can’t pay off.

Which card is best for you comes down to your financial situation, how you handle your money and which features you’ll benefit from the most.

Each of these cards can be used in different ways and comes with its own unique benefits, so many people decide to have two, or all three, of these cards.