Are prepaid debit cards a viable alternative to a ‘traditional’ basic bank account?

If you’re in the process of sorting out a debt solution, you may need to think about switching bank accounts – this is especially important to consider if you’re in debt to the same bank or building society which operates your existing current bank account. Find out more about why this is so important.

There are plenty of basic bank accounts out there, most of which are operated by the main high street banks – here is a handy list of some of the main ones.

You may also have heard about an alternative option – prepaid debit cards.

Here’s a quick rundown of what they are and how they work…

What is a prepaid debit card?

Put simply, a prepaid debit card can be loaded up with money and then used to pay for things online or in stores, and to withdraw money from cash machines. In that respect it works pretty much like a normal debit card that’s linked to a bank account. But the main difference is that there’s no overdraft or borrowing facility – you can only ever spend what you’ve loaded onto the card.

What are the advantages of prepaid debit cards?

  • No credit checks: they are normally available to anyone, even people with a poor credit rating, but your ID and address will be normally checked as part of the application process
  • Easy to apply: most prepaid debit cards have a quick and easy online application process; for most basic bank accounts, you have to make an appointment and apply in person at a branch of the bank
  • Easy top-ups: most prepaid debit cards offer various different ways to load money onto them – for example, online, by phone, at ‘pay points’ (like convenience stores) and via bank transfer. Check with your chosen prepaid debit card provider to make sure their top-up options suit you – for example, if you want your employer to be able to pay your salary directly onto your prepaid debit card, or you want your benefits to be automatically paid onto it
  • Help with budgeting: as there’s no overdraft facility with a prepaid debit card, there’s no danger of getting into further debt by spending more money than you have! And some prepaid debit cards even come with tools to help you take better control over your finances – like this one which lets you divide your money up into different ‘wallets’ to be used for different purposes
  • Widely accepted: most UK prepaid debit cards are issued by either MasterCard, Maestro or Visa, so they can normally be used in most places where these types of cards are acceptable – some common exceptions are ‘pay at pump’ at petrol stations, and they can’t be used as a deposit when hiring a car
  • Reward schemes: unlike basic bank accounts, some prepaid cards come with a reward scheme or cashback offer – check with your chosen provider to see if they offer one, but always make sure you factor in any fees and charges that you’ll be paying to use the card (see below). Examples of prepaid debit card providers that offer a reward scheme are: Pockit (up to 10% cashback at selected retailers) and The Change Account (up to 12% cashback at selected retailers)

What are the disadvantages of prepaid debit cards?

  • No overdraft facility: as you can only spend the money you’ve pre-loaded onto the card, there’s no way you can borrow money by going overdrawn
  • Fees and charges: unlike basic bank accounts, many prepaid debit cards come with a monthly fee to use the card. And most prepaid debit cards also have other transactional fees and charges attached too – check these out carefully to make sure you know what it’s going to cost you!
  • Usage restrictions: whilst you can use prepaid debit cards in similar ways to normal debit cards that are linked to a bank account, there may be some restrictions which will affect your ability to use your prepaid debit card in place of a traditional bank account – so you’ll need to check that your chosen prepaid debit card is suitable for all your banking needs
  • No direct debits: most prepaid debit cards aren’t set up to accept direct debits – in fact we’ve only found one example that allows them, and doesn’t charge a fee if your direct debit ‘bounces’ – The Change Account

Do your research!

Before opting for a prepaid debit card as an alternative to a traditional basic bank account, make sure you check out all the pros and cons. Here are the three key things you need to consider:

  • How can the card be loaded with money? And can your salary and/or benefits be paid directly onto the card?
  • How and where can the card be used? And can you set up standing orders and direct debits, if you need these?
  • What is it going to cost? Consider both the monthly fee for having the card (if applicable) and any transactional fees for everyday things like cash withdrawals, purchases, top-ups, etc.

Find out more

To find out more about prepaid debit cards, visit the Money Advice Service website. And to compare prepaid debit cards, check out Money Supermarket or USwitch.