Good and Bad Features of Prepaid Credit Cards
Opportunity to Improve a Credit Report or Costly Financial Exercise?
Feb 20, 2009
So why make a prepaid credit card application? There are no credit checks carried out when someone applies for a prepaid credit card, it’s not linked to a bank account, some don’t require a bank account, and there is no set credit limit so it’s impossible to go run up large bills.
By using certain types of prepaid card, which in essence are really debit cards because no credit is given, it is possible to begin the process of rebuilding a positive credit history.
The “creditbuilder” process works by giving the card owner a small interest free loan. Using the Mastercard prepaid credit card (cashplus example) this would be £59.40, which pays for the 12 monthly fees that would normally be levied for the use of the card.
The card owner continues to pay the normal monthly fee associated with the card, in this example £4.95, which is treated as a repayment of an instalment of the loan. Once all 12 repayments have been made this information is passed to the credit agency and listed as a successfully completed loan. It is particularly important never to miss a payment.
Some of the Other Advantages:
- If a person has been refused a traditional credit card, a prepaid card may be a suitable alternative.
- Some card companies offer a100% guarantee of acceptance.
- Prepaid credit cards may be safer and more convenient than cash.
- They can be used for travel purposes, reducing the need for cash or travellers cheques
- If someone is too young for a credit card, a prepaid credit card is an excellent alternative.
- Prepaid cards can be used to withdraw cash at ATMs.
- In order to reduce a petty cash float, businesses may give some members of staff a prepaid card.
- If a person does not have a credit or debit card, prepaid cards are ideal for shopping online.
Disadvantages of Prepaid Credit Cards
The main disadvantages of a prepaid card are the fees and charges levied, but if a person wants a prepaid card because of a poor credit rating, many of the charges are impossible to avoid, so shop around for the best deal.
The banks that issue the cards are certainly not philanthropic organisations. So what’s in it for them? Most cards will incur a purchase fee which ranges from £5-£15, monthly fees vary but many are around the £5 mark. Transaction fees again vary but could be up to 3% and ATM withdrawal fees range from £1- £1.50 although some will charge a percentage of the withdrawal amount. There is also a load fee, so every time money is loaded there may, depending on the card, be a charge.
Loading a Prepaid Credit Card with Money
Loading a card is a fairly simple procedure. It can, for example, be done at a designated outlet or by transfer from a bank account.
Limit on Usage
Limits on usage will vary but maximum amounts that can be loaded tend to be £2500- £5,000 and some cards will also cap how much can be spent in a year.
This information is obtained from the reputable sources listed below and is offered in good faith. However like all financial products it’s really important to thoroughly investigate the market and compare prepaid credit card deals.
Martin Lewis moneysavingexpert
UK Insolvency Helpline
Moneysupermarket.com
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