Think twice before going prepaid, Gov warns benefits claimants

In the email, the Department for Work and Pensions warned one benefits office that the charges incurred by using the cards might render them unsuitable vehicles to receive state benefits.

Prepaid cards are a relatively new concept in the UK, although they are well-established in the US.

As we explain in more detail in this guide to prepaid, the basic idea of these cards is that users can load on their own cash and then use it as they would a standard debit or credit card, albeit while incurring a number of charges for the privilege.

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Government Warning

Many consumers aren't fully aware of the costs involved for using prepaid cards, ministers said.

These charges typically include an initial card purchase cost, a monthly fee, charges to credit the card with money and charges to make purchases with the cards.

Even more worryingly, it seems that some prepaid card companies are targeting benefits claimants - known as one of the most financially excluded groups - in particular.

According to the BBC's Money Box programme, the Clyde and Fife Benefits Delivery Centre recently received nearly 100 requests from people wishing to have their benefits paid directly on to one particular brand of prepaid card from a company called Go: Money.

When benefits office employees contacted the customers who had made the request they found that many were not aware of the charges.

Go: Money says that it has changed its sales practices and no longer uses the sales company apparently behind the influx of confused customers.

Despite the change, however, Steve Tobin, sales director at the company, defended the use of the cards for benefits in general.

"We are giving people a choice," he said. "People can use the accounts to buy things on the internet and pay bills over the phone. We are providing a quality service. There are intrinsic costs involved, but where the benefits outweigh these costs that is the choice the consumer makes."

The prepaid problem restated, therefore, is not 'why are people using these cards?' but 'why are people having to use these cards?'

Alternatives: basic bank accounts

Mike Dailly, the principal solicitor of Glasgow's Govan Law Centre told BBC reporters that he was concerned about the fees charged by these cards.

However, he added: "I would accept that we do have problem with basic bank accounts not being available enough and not being promoted enough for people on low incomes."

Frequent use of prepaid cards is aimed at consumers who are unable to apply for a current account with a debit card at a bank either because they are too young or because they have a poor credit rating.

The cards are particularly attractive in that they allow people who don't qualify for a debit card to buy things online, by telephone or, as in this case, to receive a regular payment such as monthly pay or benefits.

But some have pointed out that the high charges associated with the cards make them too expensive to be of use and that there should, instead, be much better basic bank accounts offered by the mainstream banks.

As our guide shows in more detail, basic accounts come without overdraft facilities or additional features such as chequebooks but, because they cost the bank money to provide, they're rarely advertised.