Most people don’t like carrying lots of cash on them when they’re away. So if you’re heading off on a holiday abroad, what’s the best option for spending your hard-earned pounds sterling – credit or pre-paid card?
What’s a ‘pre-paid’ card?
Most people understand credit cards and how they work. Pre-paid cards, however, are less of a known quantity as they’ve only become available and more popular in the last few years.
Think of a pre-paid card like a debit card, except you can only spend what you have in your pre-paid account, which you can load up any time you like in foreign currency from your ordinary bank account.
You can view how much you spend and what is left online via your laptop, smartphone etc.
How do exchange rates compare?
Many pre-paid providers offer the ability to load up in just about any currency you like, and some offer great rates, especially when compared to high street banks and foreign exchange dealers. It also means you lock in the rate when you top up the card.
With credit cards, you don’t ‘load up’, you simply spend as you go, and the exchange rate you get will be whatever it is on the day you spend. Some credit cards offer very good rates, which can sometimes offset the charges for using them (see below).
Which is the cheapest to use in shops, restaurants and for paying for hotels?
Both pre-paid and credit cards involve charges but some charge nothing when you use them using your pin or touchless facility.
However, with many credit cards there’s typically a charge in the region of 2% to 3% on each transaction. And if you don’t pay what you’ve spent off at the end of the month, interest on top.
What about charges for taking out cash?
Both credit and pre-paid cards usually charge in some way or other for taking out foreign currency at cash machines while abroad.
Most charge a fee for the withdrawal, and many also charge interest on the cash taken out until you pay it off – and the rates of interest can be huge, well over 30% and more, so be very wary!
With pre-paid cards, where the card is already loaded up with foreign currency, it’s usually only a fixed charge. In euros, for example, this typically might be 1.5 euros to 2 euros, whether you’re taking out 100 euros or 500 euros.
Pre-paid cards useful for kids
One of the advantages of pre-paid cards for those with children, or who wish to give them as a gift, is that you can give yours to someone else to use.
You can then, if you want, keep an eye on spending and also top up the amount on the card as and when you like, safe in the knowledge they can only spend what you have put on the card and no more.
Security of cards
One clear benefit of credit cards over pre-paid cards is the security factor.
If your pre-paid card were stolen, along with your pin, there’s the possibility that if the thieves also have your PIN number, they could spend everything left on the card and you wouldn’t ever see the money again. But as with debit and credit cards, you’re able to cancel the card at any time, so hopefully you would realise it was missing and cancel before they did so – cancellation is carried out in the same way as with a debit or credit card, via a phone call or email etc.
However, with a credit card, the Consumer Credit Act means you would be covered by the card company on purchases between £100 and £30,000.
Likewise, the card company is also liable if a retailer, or a hotel, for example, goes bust and your holiday is cancelled. The same applies to flight, train and other transport companies.
Over-spending and interest
With a pre-paid card there is, of course, no issue with over-spending or for potentially paying interest
Acceptability abroad, including vehicle hire
It’s pretty much equal between credit and pre-paid cards in terms of acceptability for straightforward payments in shops, hotels, restaurants and most types of spending. These days, assuming they have the MasterCard or Visa symbols on the cards, they’ll be accepted just about everywhere.
However, if you’re looking to hire something, such as a car or boat for the day, you’ll almost certainly need a credit card as the hire company ‘blocks off’ a deposit in case of damage to the hire vehicle or other item being hired.
And the winner is…
If you’re simply looking for ease of use with, in many cases, lower charges, then pre-paid cards are perhaps what you should go for.
However, if you’re looking for greater security and so that you’re significantly covered for your spending and hiring of vehicles and other things, then credit cards might be best.
Our customers are at the heart of everything we do, so we have a team of experts with a real passion for making sure people get the cover that’s right for them. For more information, you can call our experts on 0330 0600 600 or visit www.policyexpert.co.uk/contact for more ways to reach us.
Published 24th July 2019