Many people have struggled to obtain credit in recent years and it has been estimated that there are around 50 million Americans that are ineligible for credit. And even those with good ratings have seen their limits eroded by banks that are eager to curb their lending.

It is becoming increasingly difficult for those ineligible for credit to function financially as cashless transactions, shopping online for example, become more and more popular. That is why many people are now turning to prepaid cards, which function much the same as a credit card but have one major difference – they must be loaded up with money before they can be used.

And, as with credit cards, there are advantages and disadvantages to using prepaid cards.

Advantages…

The most obvious advantage to using a prepaid card is that you cannot get yourself into debt as you can no longer use the card once you have used all of the money that you have loaded onto it. This ensures that you cannot spend beyond your means as you can only use money that you physically have in your bank account.

Another advantage of using a prepaid card is that’s it’s an almost failsafe way to build your credit rating, which can lead to offers of credit in the future. This is because prepaid cards offer all of the convenience and benefits of a credit card without any of the risks associated with running up large amounts of unsustainable debt. However, it is important to ensure that any prepaid card that you take out is endorsed by the relevant credit referencing agency else any transactions you carry out using that card will not impact upon your credit rating.

Prepaid cards also offer the same identity theft protection as credit cards and so, if someone did manage to steal your details, they would not be able to run up massive amounts of debt at your expense as the card is not linked to any bank account. Similarly, if you regularly load up the card with smaller amounts as opposed to loading a large amount all at once, you minimize the risk of a third party being able to go on a spending spree at your expense.

Many cards also offer the same purchase protection that is standard on most credit cards and so any purchases are protected against arriving damaged, faulty or not arriving at all. In most cases you are also protected against companies going bust and purchases are protected whether made online, in store or over the phone. But also be aware that this is not something offered by all prepaid cards so it’s vital that you check with your card issuer.

These cards are also useful to use when travelling abroad as they are more convenient than carrying around traveler’s checks and offer the same level of protection if they are lost or stolen. Furthermore, exchange rates are fixed at the time the card is loaded and so using a prepaid card when abroad is better than purchasing money abroad whereby you could fall foul of fluctuating exchange rates.

Disadvantages…

Obviously, banks are not charities and they do not provide prepaid cards for free but they can not make money via interest fees as they do on standard credit cards. This is because they are not actually lending any money! So be wary of the ways in which the banks will make money when you use your prepaid card.

Some lenders will make money out of you before you’ve even had a chance to top up your card with any money through charging an application fee. This is a fee that they charge during the application process that may fall under the heading of an ‘administration fee’. Some card issuers may also charge a renewal fee once the card has expired.

Another common way in which lenders make money on prepaid cards is to impose ‘loading fees’, charges that are incurred every time you top up your card. That is why it is important to find a card that will suit your spending, and loading, habits as these charges can come as a flat rate or as a percentage of the amount you have added. So, if you are in the habit of loading large amounts at any one time, it may be worthwhile looking at a card with a flat fee for loading money. In addition, these fees can vary depending upon the method you use to top up your card.

Once you have loaded your money, the lenders may also then charge you each time you use the card. Unlike credit and debit cards whereby transaction fees are passed on to the trader, some prepaid cards put this fee on the card user and so you may be charged, as a flat rate or as a percentage, each time you use the card.

It is also worthwhile to note that prepay cards carry a charge for cash withdrawals at ATM machines, even machines that offer free withdrawals, so it’s best to treat them as you would a credit card and avoid any cash advances.

In addition to being charged when you do use your card, you may also incur fees when you don’t use your card as some lenders will charge a fee if the card is not used for a certain period of time. Furthermore, some card issuers may also charge a monthly fee on the card, whether you use it regularly or not, so always check the charges that individual lenders impose.

To sum up, prepaid cards are a great way to keep your finances in check and build your credit rating, particularly if you have no other means of credit available to you. But before taking on a prepaid credit card it is imperative that you thoroughly check the terms and conditions to ensure that you don’t incur any substantial fees.

Article written by Andreas Nicolaides prepaid card specialist at Moneysupermarket.com

This article (Advantages and Disadvantages of Prepaid Cards) was originally developed by and is property of American Banking News. Checkout American Banking News for up-to-date banking news and peer to peer lending news.