There are probably many things you know about prepaid cards and credit cards, there may also be a chance that there are also features you weren’t aware of too. We’ve compiled a guide to show you The Good, The Bad and the Ugly of both prepaid and credit cards.
Prepaid Cards: What’s The Deal?
No credit check required
As there is no form of credit facility offered with a prepaid card there is no credit check required to open them. If you can be verified at the point of application you could even receive your sort code and account number immediately (at the end of your application) with some providers. If not you will be required to provide suitable ID and proof of address before the account details are given.
You can’t get into debt with a pre-paid account
There is no credit facility on a prepaid card therefore you cannot get into debt. You are only able to spend the money you have pre-loaded onto the card account. This can be particularly reassuring if you regularly dip into your overdraft and incur expensive charges. You can rest safe in the knowledge that you cannot overspend.
You’re always in control
You set your spending limit, not the card provider, meaning you’re only able to spend what you have loaded onto your card account, and not a penny more. This ensures you stay in control of your spending.
In comparison, a credit card provider could without consultation increase your credit limit and tempt you into spending more than you originally budgeted for, which could leave you struggling to pay the credit back.
Cut down the cost of spending abroad
Prepaid cards can be used in the same way as a debit or credit card, so you can use them abroad wherever you see the MasterCard Acceptance Mark or Visa Acceptance Mark. Some UK sterling based prepaid cards also offer a free travel cards with them specifically geared for use outside of the UK, which could save you a fair bit of cash in ATM charges and transaction fees.
You could improve your credit rating
Some prepaid cards allow you (subject to terms) to look at the possibility of lending you the pre-paid account by way of a small consumer credit loan. With ICOUNT money, this is referred to as Creditbuilder™, provided by Advanced Payment Solutions Limited. At the end of the nominated period, usually 12 months, repayment of the small loan will show up as an honoured credit agreement on your credit file, meaning you could improve your credit rating without the fear of racking up any large debt or paying interest rates which could lead to struggling to pay off the balance. As with any credit agreement though, bad credit behaviour, as well as good behaviour, is reported to the credit reference agencies.
Use as a basic type of bank account
Some prepaid based accounts come with many added features these days like their own sort code and account number, as well as Direct Debit and Standing Order facilities.
For instance, this could be handy if you were looking to separate your bill money from your spending money to gain a greater grip over your finances. If you struggle with budgeting, then using a prepaid card could be far cheaper than using a debit card and accidentally dipping into an expensive overdraft every month.
Take advantage of cashback offers
A lot of prepaid cards offer cashback reward schemes for purchases you make on the card, particularly online, so you don’t have to worry about missing out on perks.
Some come with Purchase Protection
Some prepaid providers offer purchase protection by way of chargeback and/or enhanced chargeback rights with their cards. (Chargeback rights are managed by the card schemes). You normally need to report the relevant transaction to the card issuer within 120 days (e.g. the non-delivery of goods, or details of the faulty goods).
There are fees attached
With prepaid cards come fees. Some come with a monthly fee to use the card, others have a transaction fees attached to them. If you use the ATM you will be charged anything from 50p up to £2.
Some prepaid cards charge you an inactivity fee if you leave your account dormant (if you don’t use your account for 3 months). So make sure you keep using the funds in your account – even if it’s only to buy a bottle of milk – to ensure you are using your account in the most cost effective way.
If you want to close your account and have any remaining funds sent to you by cheque you could be charged a redemption fee of up to £10.
There is no credit facility
You can only spend what you have on the account so there is no emergency fund unless you have planned ahead and saved for it making it not much use in an unexpected emergency.
You cannot earn interest
Any money stored in a prepaid account will not earn any interest. If you are looking for a return on your savings then a prepaid card is not the account you require.
Credit Cards: Tell Me More
Quick, easy way to borrow
If there is something expensive that you want and can’t afford to buy it all at once then paying for it with a credit card and spreading the cost over a few months can be really handy. They are also an easy and secure way to pay for things over the internet and are widely accepted around the world.
Just like a prepaid card, you get more protection by shopping with a credit card compared to a standard debit card. If you pay for something costing between £100 and £30,000 with a credit card (note that you only have to pay part of the transaction with the credit card), you will have the same contractual rights against the credit card issuer as you would against the merchant. In other words, if the company goes bust, or your purchase is faulty or doesn’t show up, you won’t lose out because you are able to claim your money back from your credit card provider.
You are also protected if your card is used fraudulently, as your credit provider should refund you the money. However, your credit provider would not refund you if you were found to be reckless or had consented to someone else using the card, so do not give your PIN number to anyone or allow them to use your card. If you lost your card or were negligent with your PIN (e.g. you wrote it down), you could be liable up to the maximum amount of £50.
Borrow for free
Not to be confused with free money! Some credit cards offer 0% interest periods when you first sign up so effectively you can borrow for free. This is on purchases made; most credit cards start charging interest immediately if you draw money from the ATM – so spend on your card, don’t draw on it. Also, be sure to pay off the outstanding balance before your interest free period is over or you will incur interest charges too. The average interest charge on a credit card is 18% – which is pretty high and why it’s very important to clear the balance before the interest kicks in.
When your interest free period has expired, credit card providers normally allow you up to 59 days to clear your balance in full, meaning you can still always avoid paying any interest charges. This can be a really handy way to manage your cashflow.
You can switch your balance
If you owe money on other credit or store cards, taking out a new card could be a sensible option. You might be paying interest at a rate of 18% or more, but you could cut that interest rate to zero if you transferred the balance to a 0% balance transfer card. You can expect to pay a transfer fee of around 3%, but it will be far cheaper than paying the ongoing interest fees on the other cards.
At least that way, when you make a payment, you are attacking the debt level and not just the interest costs.
Don’t fall into the debt trap
It is imperative to remember that using a credit card is a form of borrowing. You buy now and pay later and with that comes financial risks.
By not paying off your balance in full every month, you will start to build up interest charges at a fairly high rate of interest. Therefore, your debt level can spiral out of control very quickly if not managed properly.
If you only pay the minimum amount every month, it is a sure fire way for it to get out of control, so try to make sure you always pay more than the monthly minimum your credit provider is asking for. The golden rule is only ever think of a credit card as a short term borrowing facility.
The interest rate on your card is not the only cost you can pay. If you’re late making your monthly payment, or miss it all together, then you will be charged a late fee. You will also incur an extra fee if you exceed your credit limit, even if it was the interest that took you over; so make sure you keep a track of your spending and always pay your bill on time.
Two very different cards with lots of different reasons to use them. The prepaid market has really come into its own over the last decade and now provides a real alternative to high street banking, whilst over the same period the credit market has seen major efforts to ensure more sensible lending for future generations.
There are pros and cons to both, it really does depend what functionality you are looking for, but by following the tips in this guide you can significantly limit the cost to your wallet and use them accordingly.