Prepaid Credit Cards - The Facts

Posted by Nick Niesen on October 29th, 2010

The idea of a prepaid credit card has been around for a number of years, but it's only now, with the level of personal debt soaring, that it has really started to take off.

But what is a prepaid credit card? How does it work? And most importantly, can it help you avoid getting any deeper into debt?

The Basic Idea

If you're familiar with the idea of a prepaid phone card or a prepaid gift card, the idea won't be new to you. It's basically just a credit card without the credit. You load money into your card account and can then spend it using your plastic card as you would with a normal credit card.

These prepaid credit cards are accepted by hundreds of thousands of retailers and online merchants.

Dozens of financial institutions offer prepaid accounts backed by either Visa and Mastercard so they can be used globally. In fact, anyone who accepts credit cards will be able to accept your prepaid card.

And the uses are almost endless;

Top up your cell phone

Pay your bills

Buy groceries and petrol

Shop online

Book flights, hotels, tickets

Hire cars

Transfer money to family and friends

You can even withdraw cash from your account at millions of ATMs all around the globe

And once you've spent the money in your account, you can "recharge" it with more money.

The Benefits

The main benefit is that these cards are extremely flexible. You can load money onto your account using cash, bank transfer, or even using another credit card (but that's probably best avoided if you want to avoid debt).

And because most prepaid cards are backed by Visa or Mastercard, you can use them anywhere in the world as you would with a traditional credit card. In fact, the use of these cards is so similar to credit cards that they're usually called prepaid credit cards, despite the fact that credit is not involved.

The only difference is that you have to fill up your account with your own money before you use your prepaid card, which brings us to the other main benefit. It's impossible to get into debt using one of these cards, because if you don't have any money in your card account, it won't be accepted.

That gives you more control over your spending. It allows you to set a budget and put that amount in your account. There's no risk of overspending on one of these cards, which is a major advantage if you're trying to escape debt or are worried about getting into debt. And as with credit cards, you'll receive a regular breakdown of your spending on the card, which is great for keeping track of your spending.

And because you're not advanced any credit, there's no interest to pay and no credit checks to get one of these accounts. That means everybody is eligible to get a prepaid card, even if you have a bad credit record.

Other benefits include;

Travel: These cards have the same travel benefits as normal credit cards. They're accepted worldwide, especially those backed by Visa and Mastercard. You can withdraw cash from millions of ATMs across the globe. If you select the right prepaid card, you'll also be able to take advantage of foreign exchange services without paying fees. And if you lose your card, just contact your provider and they'll provide you with a new one.

Safety: If you use your card to make a purchase (by phone, internet or in person) and it is used fraudulently, the provider of your card will cover the loss just like a traditional credit card. These cards are also safer than carrying cash, which brings us to the final prepaid benefit.

Children: Prepaid cards are the perfect way to provide your children with a safe way to have access to money that you can control. Many prepaid cards are open to people of all ages, although as with traditional credit cards, some companies restrict the use of their prepaid card to people aged 18 and over.

As for the debate over whether it's a good idea for children to be allowed a prepaid card, some people argue that it will make children more financially aware from an earlier age. They claim it will teach them to understand the value of money and develop better money management skills as they grow up. It will allow them to budget without the risk of getting into debt.

Other people claim that it will encourage them to develop reckless spending habits, especially if their parents keep topping up the account. If parents are too generous, their children could get used to the pot that never runs dry, and get into serious debt when they eventually get their own credit cards.

Ultimately, it's a decision that all parents will have to make for themselves, but if used responsibly, the benefits of prepaid credit cards heavily outnumber the disadvantages, for all users.