If you've ever used a store gift card, then you'll understand how a prepaid credit card works. The concept is very simple: a prepaid credit card is pre-loaded with your own money, so you are only able to spend up to a pre-determined, set limit. These cards can usually be used virtually anywhere that a standard credit card is accepted.
Prepaid credits work in exactly the same way that a regular card works. To pay for your item or service, you swipe your card and then either enter your PIN (which is supplied with the card) or sign the receipt. The total amount of the transaction is then withdrawn from your card immediately.
The main difference between a prepaid card and a normal credit card account is that with prepaid card, you are dipping into your own money, rather than using funds borrowed from your lender. Therefore, you can only use the card until your pre-loaded cash runs out, or until you top up the account. Funds can be loaded onto your prepaid card by cash at your bank or at the Post Office, via bank transfer, or via payment from another account.
A prepaid card looks like a regular credit card, and can be used to buy all sorts of everyday expenses, including petrol, groceries and bills. Prepaid cards are particularly useful, however, when you're shopping online or overseas.
Some online retailers and service providers, such as certain airlines and hotel websites, only accept payment via credit card, and a prepaid account allows you to shop on their websites without needing an active account.
The other benefit of a prepaid card is the flexibility it provides for certain people and situations. For example, if you're new to a country and you haven't yet built up a credit rating - or you have a history of bad debt, and you're starting your credit record from scratch - a prepaid card could help you build your credit file.
Also, if you're going on holidays, a prepaid credit card offers you the opportunity to load a certain amount onto your card, so you can avoid paying foreign currency exchange fees - and so you can stick to your pre-planned budget!
With prepaid credit cards you will not be subjected to any credit checks, so you can usually get signed up for a card instantly.