Pre-paid vs credit cards

Before taking out plastic, people may want to assess the different options available to them so that they know they have made the right decision. When deciding between taking out a credit card and opting for a pre-paid card instead, it may be worth weighing up the pros and cons of both, just to be on the safe side.

Those looking at credit cards will find that there are three ways in which these can be used. People can take money out of a cash machine, make straightforward purchases or move debts from one card to another - known as a balance transfer.

Providers tend to charge a different rate of interest for each transaction before setting up a payment hierarchy, so that the cheapest debt is paid off first and interest can accrue at the highest rate possible.

There is a way to avoid this, however, and consumers may want to take out separate cards for different purposes, as this will mean they can make the most of having a credit card while paying the least amount in costs possible. However, people should remember how important it is to never take cash out of a machine, as interest rates for these transactions are typically a lot higher than those for purchases and balance transfers. There is also no interest free period to take advantage of.

When it comes to deciding what type of credit card to take out, people should review their purchasing and repayment behaviours, as this could affect which card is suitable for them. For example, if people know that they will not be able to settle the balance on credit cards in full each month, then a card with an introductory purchase offer or a low standard rate may be more appropriate.

People who spend a lot of time travelling, meanwhile, might prefer to take out a card that doesn't come with overseas usage fees, as these can push up the costs of spending cash abroad substantially.

Lenders will also look at credit histories when making decisions regarding credit cards, so a good score is of particular importance. Ratings will be affected by missed or late loan, mortgage or credit card repayments, so it could be worthwhile setting up a direct debit to ensure all payments arrive on time.

While some people will be sure that credit cards are the right products for them, others may be more inclined to opt for pre-paid cards, an option that is growing in popularity because they offer the same convenience as credit cards but do not involve any borrowing.

Instead, people just spend cash that has been pre-loaded on to their cards. As with credit and debit cards, pre-paid plastic can be used to pay for goods in shops and on the web, as well as taking money out of a cash machine. To load one up, all people have to do is transfer some funds from their own bank account, or do so at Post Office branches or Payzone and PayPoint facilities.

The benefits of pre-paid cards in the UK are relatively varied, with perhaps the most important being that people are afforded greater control over their spending. They are also particularly convenient and easy to use, while consumers may be pleased to hear that there is no need for them to go through a credit check.

Pre-paid cards are safe and secure and can be used abroad, with many providing holidaymakers with good exchange rates. Overseas travel may be where they come into their own, as it is more difficult to overspend on this type of plastic than on credit or debit cards. In fact, these latter products can also see people incur expensive charges, which cannot happen on pre-paid cards.

Students may find pre-paid cards particularly convenient as it gives them the same freedom a credit card does, but without the opportunity to rack up huge debts.

Parents, meanwhile, may also find these products to be useful when it comes to teaching youngsters about budgeting. People with poor credit histories may also find pre-paid cards to be the best option, as well as those just moving to the UK who are struggling to open a bank account or take out a credit card. 

Moneyextra.com recommends you take independent financial advice before acting on any article

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2011-08-05 16:27:58 © Moneyextra.com