Are you thinking about obtaining a prepaid card instead of a credit card? Depending on your financial situation, it could be a worthwhile move.
Although a prepaid card and a credit card may look very similar, they are two very different products. Read on to find out the difference and why having a prepaid card could be a better option for you than a credit card.
What are prepaid cards and credit cards?
A prepaid card is a plastic alternative to cash: it is loaded upon purchase with a set amount of money. You can then use your prepaid card in a variety of retailers and top it up when you have spent the balance.
In contrast, a credit card is a type of loan where the money you spend on the card is borrowed from the credit card issuer. The balance must be repaid in full each month, or interest will be charged on the debt.
Why might you want a prepaid card?
There are three reasons why you might want to consider a prepaid card instead of a credit card.
1. Avoiding interest payments
One of the advantages of a prepaid card versus a credit card is that no debt is incurred when you use it. Therefore, you are not charged interest.
Interest payments on existing credit card debt can be a significant amount for some consumers, since the interest rates on credit cards are much higher than for other forms of debt such as a mortgage or personal loan. A key reason for this is that credit card debt is unsecured, so credit card issuers may be less likely to recover their loans should a credit card holder fail to make repayments.
Around 40% of credit card holders in the UK make interest payments each month. If you are worried you might end up in the same situation, a prepaid card could be beneficial.
2. Helping you to budget effectively
Budgeting is never easy. However, a credit card may make it even more challenging. Although credit cards come with spending limits, the limits are generally much higher than the amount you would normally spend from month to month. Therefore, it is relatively easy to spend more than you intended and possibly more than you can afford.
A prepaid card is loaded with cash, therefore it is not possible to spend more than the balance in your account. This may help you avoid the temptation to spend more than your salary each month, and could make it simpler to budget.
3. Availability to people with different credit histories
Although someone with a poor credit history may be able to obtain a credit card, they may not be offered the advertised interest rate by credit card issuers. Those representative rates are only required by law to be provided to the majority of successful applicants, which means that the remainder may receive less favourable terms.
Prepaid cards do not include debt, and are therefore equally available to consumers with higher and lower credit scores. This makes prepaid cards more accessible than credit cards, while providing the convenience of being able to use a card rather than cash.
Summary
A prepaid card is a very different product from a credit card, because card holders do not incur a debt as a result of using it. Hence prepaid cards are available to a variety of consumers with differing credit scores. Since a prepaid card is based on cash rather than debt, it may make budgeting easier and be especially appealing to consumers who are concerned about incurring interest charges as a result of not repaying their credit card debt in full each month. For some people, therefore, having a prepaid card may lead to an improved financial situation in the long run.
