Why use a prepaid card?

Why use a prepaid card?

Why use a prepaid card?

Prepaid cards are gaining popularity in the UK for few key reasons but should you get your hands on one and when, if ever, are they replacement for credit cards? This article finds out.

So, first things first, what's behind the popularity of prepaid cards?

There are three key things that have driven the popularity of these cards: under-18 use, availability of credit in the recession and use for budgeting.

To take the youth aspect first, prepaid cards are useful because they're a way for those who are under 18 (and even under 16) to get their own card.

Many banks and building societies are reluctant to offer debit cards to those who are under 18 so prepaid can provide a handy alternative especially given that prepaid cards can be used for online transactions which are becoming increasingly popular in themselves.

Online gaming, including through social networking sites such as Facebook, is one of the key drivers of online use money use amongst under 18s as they monetise popular free games.

Prepaid cards have also become increasingly important in the recession.

As lenders become more nervous and excellent credit scores are needed to apply for most credit - as any credit card comparison can demonstrate - those at the bottom of the credit ladder find themselves unable to get any credit at all.

For them, certain prepaid cards - which show up on credit reports as a sort of low-interest loan - can help to build up a new credit score or rebuild a damaged credit score.

As the recession leads to some people being unable to access current accounts, prepaid cards can also be a way for the very poor to manage their money since no credit checks at all are required to hold one.

That brings us to the third reason for prepaid card popularity: budgeting.

Holding only a fixed balance on a prepaid - as opposed to borrowing - can help users keep tabs on spending and avoid interest payments.

Unfortunately, as you'll notice if you compare prepaid cards prepaid might not have interest but it does have its share of interesting fees and charges.

Some cards charge per top up and some charge more depending on how you spend (e.g. purchase, cash withdrawal etc...) so it's vital to plan how you're going to use your prepaid card and compare accordingly.

In this sense, it would be much better to spend using a 0% purchase credit card. However, as we've seen above, many people who use prepaid can't get access to mainstream credit.

So all in all, prepaid won't ever replace credit cards but they are a good alternative for a minority of card users, though that minority is growing all the time.

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