Prepaid plastic is the new must-have for credit-crunch holidays

Travellers can avoid transaction costs, fluctuating exchange rates and overspending, with a bit of pre-break research.

With the recession and the pound struggling against other currencies, many holidaymakers will be looking for ways to cut costs this summer, but do prepaid cards hold the answer? They can be both a safe way to spend abroad and a useful way to rein in your spending but with fees varying widely, the wrong card can also be an expensive option.

Prepaid cards are preloaded with money and used to make purchases, so one of their major benefits is that they are safer than carrying credit or debit cards as thieves and fraudsters can only spend the remaining balance.

Prepaid cards can also be a useful way to cut costs on currency exchange. The two standout cards are the FairFX and Caxton, which are specifically designed for use abroad and incur no transaction or loading charges. "The consumer gets a much better deal for their pound," says Stephen Heath, chief executive of FairFX. "It's more convenient and secure than cash."

The FairFX card costs £9.95 (although this fee is waived by most retailers) and can be topped up for free by debit card or a bank transfer. There is a charge of £1 for cash withdrawals from an ATM, although this is still less than most credit or debit cards. The Caxton card is free to purchase and although it charges £1.50 on UK transactions, it is free for purchases made elsewhere. Even better, there are no loading charges and although the global card charges £1.50 in the UK for ATM withdrawals it is free abroad.

Prepaid cards also provide competitive exchange rates, which can be fixed when you load the card with a foreign currency. Transferring money to friends and family abroad can also be costly but again prepaid cards offer a cheaper solution - a card can be posted overseas and then topped up from back home in the UK once it has been received.

With the credit crunch forcing many of us to be more financially disciplined, prepaid cards can be a useful budgeting tool too. As there is no way to overspend on the card there is no risk of getting into debt, which can be particularly helpful for parents looking for a simple way to limit their children's spending.

Prepaid cards are also reasonably transparent about the way fees are incurred whereas with a credit card, interest charges, late fees and balance transfer fees can often result in the owner racking up huge bills unwittingly.

When it comes to picking a prepaid card it is vital to check for the various fees. "It's all down to using the right card and steering clear of any that charge you for spending your own money," says Dan Moore, senior researcher at the consumer group Which? And those charges are not insubstantial. Many will charge an initial fee of around £10 to purchase the card itself but there may also be replacement fees and renewal fees and some could even charge a monthly holding fee, which can work out to be expensive.

Typically, ATM withdrawal fees will apply but lots of cards will also have transaction charges for retail purchases and when topping up the card it is common to be charged either a fixed rate or a percentage of the value added. Access is another important consideration as some cards will only allow cash to be loaded at post offices and PayPoint machines, while others allow them to be topped up online with a debit or credit card. "Most prepaid cards incur hefty charges and some of them are quite ridiculous. When you bear in mind that you don't earn any interest on your money, I think that's appalling," says Mr Moore.

Aside from the range of fees, the biggest drawback to a prepaid card is that they are not covered by Section 75 of the Consumer Credit Act. This refers to purchases made on a credit card, costing at least £100 and no more than £30,000, and states that the card provider is jointly liable along with the retailer for that purchase.

However, prepaid cards can be a lifeline for anyone without access to a bank account or struggling to get approval for a credit card. The applicant's credit rating is irrelevant because there is no borrowing involved and therefore no risk to the card company.

There are even prepaid cards designed specifically to help rebuild credit history such as the Cashplus Creditbuilder which costs £4.95 initially and charges a monthly fee of £4.95. There is no need for a credit check to apply for the card and as long as the monthly fee is met regularly for a year it will show up on the credit history as a fully repaid loan. Missing one payment however, will actually damage the cardholder's credit history rather than help to rebuild it so it is vital that all payments be met.