Prepaid credit cards are not only convenient for travel and online purchases – they can help you budget better and even improve your credit score. But how can you access the best benefits?
Are you feeling the financial squeeze? Tempted to cut up your credit cards to stop spending money you don’t have?
If so, you’re far from alone. Last year, credit card use dropped by a staggering 12.9% as hard-pressed householders turned their backs on credit and switched to debit cards and cash.
It’s easy to see the attraction. With debit cards and cash, you have the advantage of spending only money in your account – or available via your overdraft.
But if you’re keen to stick to a budget, there’s another way of managing your money that’s often overlooked – the prepaid credit card.
We take a look at how these cards can help you.
What is a prepaid credit card?
Prepaid credit cards work in much the same way as traditional credit cards – except you spend money that you’ve loaded onto the card in advance, not money from a credit account.
There are two main types of card – prepaid credit cards for everyday use and prepaid currency cards for use abroad. Depending on your circumstances, both kinds can be of significant help to your budget.
Sticking to a spending limit
The biggest advantage of a prepaid credit card is that you can decide how much you want to spend each month and then load only that amount onto it.
Some cards even allow you to pay your salary or wages directly onto a prepaid card, which means you can use the card as the main method of managing your budget – and then pay any money you’ve not spent into a savings account.
And because you don’t need a bank account to have a prepaid credit card, they offer people without bank accounts a handy way to manage their budgets.
Avoiding overdraft fees
If there isn’t enough money on your prepaid credit card, it won’t work. That means that – unlike with cheques and some debit cards – you don’t run the risk of spending money on an unauthorised overdraft. Unauthorised overdrafts often incur significant fees, so if you avoid them you don’t run the risk of punching an unexpected hole in your finances.
Saying goodbye to interest charges
Traditional credit cards can cost a small fortune to maintain, particularly if you don’t pay off outstanding balances. Prepaid credit cards avoid this problem entirely – the money you load onto the card is yours, so you don’t pay interest on it. Instead, you’ll normally pay a low monthly fee for the card service itself.
Building your credit score
If you’ve got a poor credit rating, borrowing money or obtaining credit can become difficult and expensive.
The good news is that prepaid credit cards are a good way to rebuild your credit score – and that can have a positive outcome for your future budgeting.
Depending on the card you choose, you can opt for a credit rating improvement package. These usually mean the credit card company ‘lends’ you a year’s worth of monthly card fees – up-front and interest free. As you pay each monthly fee, it’s entered on your credit report, helping you to rebuild your credit rating.
Keeping track of the kids’ spending – and help them to budget
If you’ve got older children, you’ll know how easy it is to hand over money for almost every occasion – nights out, driving lessons, hobbies, school trip spending money. The list goes on.
Giving your son or daughter access to your credit card account can be hair-raising, especially if they lose the card or it gets stolen.
A far better idea is to load your children’s allowances or spending money onto a prepaid credit card. It’s a great way to teach them budgeting, and there’s no chance they can run wild with your own credit account!
Saving money abroad
If you travel abroad on business or for holidays, you can make significant savings using prepaid currency cards. They can help you avoid currency commission charges and often offer a lower exchange rate. See our top pay-as-you-go currency cards for a full comparison.
If you think you or a member of your family could benefit from a prepaid credit card, shop around for the best deals. We recommend you start by looking at Escape and Virgin – both provide prepaid credit cards which also give you access to special discounts, helping your budget stretch that little bit further.