Prepaid Charge Card Pros and Cons

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    Oct 23, 2013
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Credit Cards In Wallet 2
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Prepaid Cards Defined

Prepaid cards represent an alternative for individuals who cannot or choose not to obtain a conventional credit card or a charge card. Just as with a debit card issued by a bank, the “credit” limit for a prepaid card is limited to the amount in funds that you have loaded onto the card. As a result, there is no possibility that you will incur finance charges on purchases that you have made with a prepaid card.  On the other hand, prepaid cards carry a number of significant limitations.

Credit-Building Versus Standard Prepaid Cards

A significant limitation of many prepaid cards is the fact that they do not report the transactions of card holders to the three major credit reporting agencies in the United Kingdom: CallCredit, Experian and Equifax. However, a special category of prepaid cards do report user transactions to credit reporting agencies. Wise use of credit-building prepaid cards can help you establish or rebuild your credit.

Advantages of Prepaid Cards

Prepaid cards require no credit check.  Minors are freely allowed to obtain prepaid cars. This is because prepaid cards limit your spending ability to the amount of funds loaded onto the card. Unlike a charge card or a credit card, you cannot go over your credit limit with a prepaid card. In other words, there are no credit-granting decisions associated with a prepaid card because no credit is being granted. In addition, many prepaid cards offer a direct deposit option that allows you to access funds deposited to the prepaid account earlier than would be able to access your funds by cashing a paper check.

On the other hand, you can shop with a prepaid card online and use your prepaid card to reserve and pay for plane tickets and hotel rooms. Prepaid cards also represent a safer way to carry liquid funds than carrying large amounts of cash.  If you lose your prepaid card, or if it is stolen, you can receive a replacement within days, with little risk of losing your funds, even if your card is fraudulently used. In addition, prepaid cards are accepted in nearly every venue that accepts conventional charge cards and credit cards.

Disadvantages of Prepaid Cards

In many respects, prepaid cards are similar to charge cards, but with few of the associated prestige or advantages. You do not obtain access to exclusive airline lounges by flashing a prepaid card. Many prepaid cards do not offer rewards or points programs. On the other hand, prepaid cards carry significant fees, including annual fees, monthly fees and fees for ATM transactions. When combined, these fees can add up to be significant.

Except for their acceptance by merchants that also accept credit cards and charge cards, prepaid cards offer few of the advantages of a conventional credit card or a charge card. You do not receive an interest free loan with a prepaid card, and you cannot make payments over time. There are no balance transfer opportunities with prepaid cards. Except for credit-building prepaid cards, prepaid card activity is not reported to credit reporting agencies. This means that if you are attempting to rebuild or establish credit, using a prepaid card will have no beneficial effect at all.

Prepaid Cards Versus Debit Cards

For parents of young children, prepaid cards represent a safe alternative to cash. Kids can use prepaid cards to purchase nearly everything that they want, including snacks, ringtone downloads or online game credits. The vast majority of prepaid cards also allow cardholders to make withdrawals at ATMs when cash is needed. For nearly everyone else, however, including older teenagers, debit cards issued by banks represent a more desirable alternative to prepaid cards.

Unlike prepaid cards, bank debit cards frequently carry few or no fees, which makes them much less expensive than prepaid cards. Bank debit cards also carry logos that allow cardholders to use them for online purchases, for restaurant meals, for retail transactions and to reserve and pay for travel accommodations. Band debit card holders are also frequently able to take advantage of direct deposit schemes

Choosing a Prepaid Card

If you decide to obtain a prepaid card, it pays to shop around. Look for cards with the lowest direct fees such as monthly fees. You should also seek out cards with low or no transaction fees, as well as cards with low ATM fees. And if you are seeking to build or rebuild your credit, insist on a credit-building prepaid card.

Author's Profile

Sam Jones is often approached by people looking for a charge card deal. He refers them to on the uSwitch price comparison site.

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