You load up on fees when you load up the plastic. But prepaid cards have a place

The idea of paying a company for the privilege of using our own money might not seem very tempting but this is the deal with prepaid cards – and they are taking our spending habits by storm.

Customers "load" a card with cash and then spend on it in the same way and in the same places as a debit card, usually using the Maestro or MasterCard systems. Once the money runs out, most cards will allow you to "top up" your balance online, at a post office or at shops displaying a PayPoint symbol. But this is not a card linked to a bank account, there are no credit facilities available and no iden- tity check is carried out.

And the charges can be very high. The average application fee for a prepaid card is around £7, according to research by Virgin Money, and can be as much as £20. Some 40 per cent of providers also levy a monthly fee, ranging from £1 to £6, and many will charge you for withdrawing cash at an ATM. You may even be punished with further charges if you fail to use your card for more than three months. Cancelling your card could cost another £10.

Some providers will also take a percentage of the card's balance as well as these fees, up to 3 per cent, and calling the company can cost as much as 80p per minute. And to cap it all, the prepaid card market is not regulated, so if there is a dispute over a purchase, say, or your balance, you may struggle to get your money back.

"These cards don't levy interest, an overdraft fee or other charges associated with credit and debit cards, so they have to earn their money somewhere," says Steve Willey at price-comparison site Moneysupermarket.co.uk. "Some people with no other banking options are clearly being taken advantage of."

Jasmine Birtles founder of advice website Moneymagpie.com, says: "There are so many cards with different charges for transactions, cash withdrawals, top-ups and purchases, and this makes it very difficult to compare them. The first thing to do is think about what you want to use the card for, and then pick one that meets that need for the least cost. So if you want one for everyday use, make sure it doesn't levy big charges for withdrawals or purchases."

There are now 45 prepaid cards, from providers including Newcastle building society, and more are expected to jump on the bandwagon. The technology is evolving rapidly, with some cards now offering "one touch" facilities that allow customers to pay for items under £10 without entering a pin number. Barclaycard recently launched its OnePulse, which incorporates the customer's Oyster card, the London electronic travel pass.

These cards represent huge money-making opportunities for providers, but they do also have benefits for some customers.

They began life as a way for parents to control their children's spending, and can help users budget more easily. Meanwhile, foreign exchange prepaid cards, from providers like the Post Office and Lloyds TSB, usually convert sterling into euros or dollars and often offer a far better rate than a bureau de change or a cash machine abroad. Some even allow customers to "lock in" an exchange rate up to six months before you use the cash. There is also a degree of security built in. "Prepay cards are separate from your bank account," explains Ms Birtles. "So if a fraudster tries to copy them or steals the number, it won't drain your funds."

And crucially, because there is no credit check, those who have difficulty obtaining a bank account with a debit card can get access to the same facilities as mainstream card users, including online shopping. Some products, such as the White Eagle Payroll, allow you to receive your salary on the card via the Bacs electronic payment system.

In fact, the cashplus Gold card from APS Financial can help its users improve their credit rating. The monthly fee of £4.95 is converted into a 12-month loan of £59.40, with 0 per cent interest. The customer pays this off every month and a positive note is added to their credit file.

"There is a real mix of cards on offer," says Mr Willey. "Many have improved their offers and some do provide options for those with few other choices. But look carefully at the pricing structure and decide if it is really worth managing your money this way."

Over time, Ms Birtles believes the number of cards will decline. "We are right at the start of this market and there seems to be a new launch every week. But I can see just a few big brands emerging and some of the smaller cards disappearing as they won't be able to offer an extensive service or price themselves competitively."

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