Pros and Cons of a Prepaid Credit Card
Prepaid cards are a fairly recent development in the area of plastic payment methods. Although often referred to as 'credit' cards they are really nothing of the sort, requiring you to load the card with cash before you can use it. At first you might not see the point in doing this but there are several advantages to them:
The biggest problem with a credit card is the ease with which you can spend on it, which makes getting into debt a likelihood rather than just a possibility. Only a minority of people have the self discipline to use a credit card only when necessary and pay off the balance each month. Most people end up carrying at least some expensive debt on their card. Prepaid cards don't have this drawback as you can only spend funds you've already deposited and debt is impossible.
No Credit Check
Prepaid cards are easy to be approved for as credit history is of no relevance. Just pay the usually small application fee and in almost all cases the card will be yours.
Use Like a Credit Card
Mastercard or Visa branded prepaid cards can be used in most of the same situations as an ordinary card, for purchases and cash withdrawals wherever the logos are shown. There is an exception though that we'll come to later.
Teenagers Can Use Them
Unlike a credit card where a minimum age of 18 or even 21 is required, a teenager can use a prepaid card. This makes it great for parents giving pocket money or for spending the proceeds of a part time job. Much safe than carrying cash around too!
Prepaid cards offer a good way of taking cash abroad and withdrawing it from an ATM. If you lose your card, it can be replaced without you losing your money. Think of them as a modern and more convenient version of a traveller's cheque.
Improve Your Credit Rating
If you have impaired credit and don't qualify for a bad credit credit card, then some kinds of prepaid cards can help you rebuild your credit rating. By charging a monthly fee for card usage, the card issuer can classify this as a loan and report your fee payments to the credit reference agencies as 'positive' entries on your file.
Unfortunately, there are disadvantages to prepaid cards too:
Depending on the card, you'll be charged for taking one out, or for loading money on to it, or every time you use it. Some cards may even charge for all 3, but if you compare prepaid credit cards carefully you should be able to minimise the fees to some extent.
No Consumer Protection
With a credit card you can claim back from the issuer if a mail order or internet purchase goes wrong and you don't get the products, or if the products are faulty or otherwise not fit for purpose. A prepaid card offers no such protection.
No Financial Protection
If you have cash in a bank account, you're covered if your bank goes bust and you won't lose any money. Once you've transferred funds to a prepaid card, they are at risk if the card issuer goes out of business. Because of this, only transfer small amounts at a time.
Slightly Limited Usage
While prepaid cards can be used more or less anywhere that a credit card can, there is one specific instance where they can't be used. This is when you need to get an authorisation for an amount without actually having the money taken from the card. Examples include reserving a hotel room without actually paying when you check out, or paying a deposit on hiring a car which would be refunded upon return of the car undamaged.