Martin Lewis says millions of low income families are wasting cash with prepaid cards – how to avoid fees
MARTIN Lewis has issued a warning for families using prepaid cards to pay bills that they often come with expensive and unnecessary charges.
He urged people to consider whether a basic bank account might be a cheaper way to deal with day-to-day spending in this week's MoneySavingExpert newsletter.
Martin said that his advice was aimed particularly at lower-income families who often use prepaid cards as they don't think they can access a traditional bank account.
What is the difference between a prepaid card and basic bank account?
Basic bank accounts are designed for people who don't have access to current accounts, usually because they are on lower incomes and have a poor credit history.
The no-frills accounts work like a normal bank account where you can pay money in and pay off your bills.
But unlike a normal current account, you usually won't have access to an overdraft, and some don't have apps, associated savings accounts or contactless cards, for instance.
Prepaid cards, on the other hand, are usually run by tech companies and allow you to load cash on and spend it when you're out and about.
There's no credit check when you apply for one, and you can limit your spending to what you've loaded onto the card.
They're good for anyone who wants to b control their spending, but they are also being used by lots of people on lower incomes who can't access a current account.
One of the main differences between the two is that basic bank accounts legally have to be free, while lots of prepaid cards have hefty charges.
For instance, you'll pay £10 per month at ThinkMoney or £2 per month at Pockit with added 99p charges for use cash machines or paying bills.
What is a basic bank account?
A basic bank account is designed for people who have experienced serious financial difficulty and don’t qualify for a standard current account.
This could be due to county court judgements, bankruptcies or if you haven't built up enough credit history.
It acts like most standard accounts so you can pay in and take out money and set up direct debits to cover your bills.
Most importantly, you can use it to receive your wages and benefits.
Many providers will give you a debit card to use too – but with one major difference.
Because they're designed for customers who have experienced serious money trouble before, most of them don't offer an overdraft facility.
This makes it important to check your balance regularly, especially if you set up regular payments as you could be charged extra if you miss a payment such as to a loan provider.
This is the main reason that Martin Lewis is urging people to switch to basic accounts.
He said: "Sadly there are still a million people unbanked in the UK – usually on low incomes. In recent years a range of easy-to-get prepaid cards have filled the gap, but they can charge hefty fees.
"Do you pay to bank with Thinkmoney, Pockit, Monese, Vox Money, MoneyMona or other prepaid card accounts? If so, I'm worried you may be wasting your money.
"Some have chosen these accounts deliberately for functionality, but my focus here is on those who did it as they felt they couldn't get a free bank account."
The second difference is that basic bank accounts are strongly protected in consumer law. This means your money is safe if the company goes bust (up to £85,000) and there lots of rules about how the bank has to treat you.
Because prepaid cards are often run by tech companies, they do not have the same levels of protection.
He said that anyone usingprepaid cards for this reason should check out whether they can open a basic bank account instead.
The other factor is the level of protection you get with a bank compared with prepaid cards. Bank accounts are protected up to £85,000 under the UK savings guarantee and have strong rules around protecting you from fraud and looking after your cash.
How to choose a basic bank account?
If you've got a decent income and a good credit rating, you'd be better off trying for a current account rather than using a basic one.
They're great for those who qualify, because they often have perks such as switching bonuses, interest on accounts in credit and planned overdrafts.
But for people who can't access these accounts, a free basic account should meet their needs.
Any bank or building society can offer a basic bank account, – and some will let you open a joint account if your partner also qualifies.
Since 2016, a law to encourage financial inclusion has meant that all the largest current account providers have to offer one.
Here are the major banks' basic accounts:
- Allied Irish Banks Current Account
- Bank of Ireland Basic Cash Account
- Barclays Basic Current Account
- Co-op Basic Bank Account
- Danske Bank Standard Account
- Halifax Basic Bank Account
- HSBC Basic Account
- Nationwide FlexBasic
- NatWest Everyday Account
- Royal Bank of Scotland Everyday Account
- Santander Basic Current Account
- TSB Cash Account
- Virgin Money M Account
A comparison website can help you find the best basic bank account.
It's worth shopping around, because while there are rules that all banks must follow, some providers may offer extra features such as a contactless debit card, online banking, apps or spending alerts.
Some may even have a buffer zone that lets you withdraw a small amount, such as £10, even when your balance is low.
The MoneySavingExpert team recommend three top picks for the best basic account to go for. These are:
- Co-op's Cashminder – open online, only uses 'soft' credit check for ID purposes
- Santander Basic Current Account – open online, only uses 'soft' credit check for ID purposes
- Virgin Money M Account – open online (via applying for another account), does 'hard' credit check though
How to apply for a basic bank account
Anyone can open a basic bank account, but you'll still need to pass basic security measures to prove who you are.
The only exception is if you have a history of fraud – in which case you can still be barred from having an account.
This will usually be something like your passport or driving licence – but bills or documents and letters regarding benefits might work.
It's best to speak to the bank in question to find out exactly what they will and will not accept.
If you're applying over the phone or in a bank branch, it's important that you make it very clear you want a basic account or you will be steered towards a current account with more stringent qualification criteria.
Martin explains in his newsletter that people usually get directed towards a current account, even if they explain that they've got poor credit record,
This means people end up getting rejected and thinking they aren't eligible for an account with a traditional bank.
There may still be fees for using your card abroad or foreign currency charges though so check with your provider.
Halifax will pay you £100 to switch bank accounts.
Tesco Bank is trialling new prepaid debit card with perks like extra Clubcard points.
Martin Lewis explains how couples can get up to £340 in free cash from banks.
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