Are Prepaid Cards Expensive And Dangerous?
Prepaid cards have taken the finance world by storm. While, in the USA, some TV stars have begun issuing prepaid cards under their own name, the UK has seen a rapid rise of prepaid card use in relation to credit cards. The reason for this development isn't hard to understand: Simply put, customers with a bad credit rating are increasingly finding it impossible to get a regular credit card. Since a credit card is required for some purchases, however – especially when it comes to buying goods and services online – prepaid cards are the only viable option for them. As their popularity continues to soar, meanwhile, they have come under fire for being expensive and burdening holders with unnecessary costs. About time to check how much of these claims actually holds up to scrutiny.
First, though, what is a prepaid card?
A prepaid card is much like a debit card in that you can use it to make purchases all over the world. It is accepted wherever you see the Visa or Mastercard sign and is protected by chip and PIN technology. You can even use it to safely take travel money abroad. A prepaid card is also good for people who can't get traditional debit cards due to bad credit scores or for parents who want to give their children some financial independence without them getting into debt. The good things for many is that there is no credit facility such as an overdraft on a prepaid card: As long as you have money on the card you are free to spend it wherever the card is accepted.
Separating the wheat from the chaff
One of the things that's wrong with the general argument against prepaid cards is that their conditions can vary wildly. Also, the market for prepaid cards is growing all the time and so it can be hard to know which prepaid card to choose. So what differentiates a good prepaid card from a bad one? Each has its own pros and cons which you should weigh up before making your application. For example, some cards charge an administration fee for setting up the card. Some prepaid cards give you discounts in shops. Others charge for using ATMs, others yet will give you rewards such as free mobile phone minutes or texts for using a certain amount of money on your card. Others may charge you for every purchase you make, although some might only charge you if you use the card abroad. So to compare prepaid cards you should look at your lifestyle and where you will be using your card. If it is mainly to withdraw money from an ATM then look for the card with the lowest ATM fee. This will be a good card for you, rather than a card that doesn't charge you for making purchases but will charge you for using the ATM. If you plan on buying things with your card, either in shops or online, but don't really use ATMs then the best card for you would be one that charges a higher fee for ATM use and nothing for purchases. The initial fee is normally nominal or even free so this isn't really a problem.
So … are they too expensive?
It goes without saying that prepaid cards are not and can not be entirely free. Each company has to at least cover their costs and this applies just as much for prepaid card providers as for credit- and debit card- companies. What is different is the way these companies are charging you for their services: With a debit-card, each transaction, regardless of whether it's made in a shop, restaurant, online or a cash withdraw, costs money. Credit cards, on the other hand, charge interest on any balance spent. While there are definitely some prepaid card issuers, who are slapping high fees onto their products, the majority of them seem moderate compared to the costs incurred by some credit cards. Prepaid cards can also make for a great travel card and actually save money as they give you the best exchange rate possible on your currency.
All of this doesn't mean that prepaid cards are perfect for everybody. And it certainly doesn't mean that all prepaid cards are equal. But in terms of costs, they are by no means worse than a credit- or debit-card by default. Quite on the contrary: By bringing a breath of fresh air onto the financial markets, prepaid cards have brought serious competition to the big banks and financial institutions and in doing so made things better for consumers. And that, it goes without saying, should be something everybody can agree to.
This article was written in association with http://www.eccount.com/, a leading service provider in the field of prepaid cards. William Masters is an economics writer hailing from London. William has gathered extensive experience for a wide range of print- and online-publications with a particular focus on issues of prepaid cards, credit card technology and smart budgeting. When he's not dedicating his time informing you about recent economic developments, he enjoys a good game of checkers or taking his dog for a walk.