It’s been a tough couple of years for anyone wanting to get credit and even those with good credit ratings may have had their credit card and overdraft limits gradually whittled down as lenders have looked to adopt a more austere approach.
And with an estimated 50 million Americans ineligible for credit, it’s no wonder that the popularity of prepaid cards is on the rise.
So what is a prepaid card?
A prepaid credit card is simply a card that looks very much like a credit card and can be used in much the same way, the main difference being that you need to load the card with money before you can use it.
What are the advantages of a prepaid card?
Don’t get into debt!
Once you have exhausted the funds that you have pre-loaded onto your card it won’t let you spend any more until you load it with more cash.
This means that you cannot get into debt as you would with a credit card or a debit card with an overdraft facility as you can only spend what you’ve got.
Build your credit rating.
Prepaid cards offer a great way to build up your credit rating as you have many of the benefits and convenience of a credit card but none of the risk associated with running up large amounts of debt.
In addition, many of the banks that offer prepaid cards will be likely to offer credit once you have proved you are no longer a high credit risk.
Identity theft protection.
Identity theft linked to credit and debit cards has become an increasingly worrying phenomenon over the last few years and prepaid cards could be one way to protect against this.
If a fraudster did manage to steal the details of your prepaid card, they would not be able to run up credit at your expense as the card is not linked to any bank account.
Foreign travel.
Prepaid cards offer a convenient alternative to carrying around traveller’s cheques and offer the same level of protection if they are lost or stolen.
In addition, exchange rates are fixed at the time of loading your card so you won’t fall foul of any fluctuations in the exchange rate as you may when purchasing money abroad.
Furthermore, as long as the local currency matches the currency loaded on to the card, there will be no foreign-exchange fees for goods bought with the card.
So what are the disadvantages?
The banks need to make money out of prepaid cards somehow and, as they can’t charge interest because it’s essentially your own money that you’re using, they claw back the money through a series of fees related to the card.
Application fees
Some lenders will charge you a fee when you first take out a prepaid card with them else they will charge you a renewal fee once the card expires.
Loading fees
Although it’s your own money you are using, you’ll often be charged every time you load your card up with funds and this can come in the form of a flat rate or as a percentage of the amount you have added.
The fee may also vary depending upon which method you use to top up the card.
Transaction fees
With credit and debit cards, the transaction fees are passed onto the trader, but with prepaid cards you foot some of the bill.
Again, this can come in the form of a flat fee or as a percentage of your total spend.
In addition, prepaid cards carry a charge for money withdrawn at ATM machines, even from machines that don’t charge for withdrawals, so it’s best not to withdraw cash on a prepaid credit card.
Inactivity fees and monthly charges
Some issuers will charge a fee if the card is not used for a certain period of time and some also charge monthly fees just for carrying them so always read the terms and conditions before signing up.
Protection.
Whilst purchases made on credit cards are protected against loss or theft, this is not the case with prepaid cards.
So, if, for example, you make an online purchase but never receive the goods, you will not get your money back as you would have if you had paid with a credit card.
Article written by Les Roberts finance writer for Moneysupermarket.com
