Are prepaid cards the new cash?
High charges and higher entry barriers have taken the shine off the convenience-appeal that credit cards have long held over traditional money. That, combined with credit score based approvals meant that these cards were leaving behind a massive group, forming a new class of consumers, a majority of whom are in their teens and early 20s. These consumers have requirements centering around online shopping, gaming, travel etc. that are not easily fulfilled by cash alone. Prepaid cards are fast filling this void left behind by credit cards.
Easily available
Prepaid cards reach out to those for whom credit cards are
a. an expensive proposition owing to their high charges,
b. a hassle due to tougher application requirements,
c. not an option, for lack of better credit history or
d. unavailable for reasons such as, age, status etc.
However, with many of the benefits behind them, prepaid cards are not without shortcomings. If you're out to get one, there are
some facts about these cards that demand a better understanding of, so as to avoid later (and costly) surprises.
No credit scores with prepaid cards
Unlike credit cards, prepaid cards need to be loaded before they can be used and as such there is no element of using borrowed
money. Because of this reason, prepaid card usage does not contribute to your credit score. If you aim to build credit rating,
consider other alternatives.
There do exist some prepaid debit cards that claim to
repair credit score by adding the element of 'lending' to the card. Card providers achieve this by lending the annual usage fee of
the card to the holder, who is then expected to regularly pay the usage fee in monthly installments to improve their credit score.
Hotel or rental car booking
Unlike their counterparts, most prepaid cards are not accepted to make bookings at hotel or rental car agencies. This is mainly
because the final amount in such transactions is unknown at the time of booking. Typically, such transactions require customer
authorization to put certain card balance on hold until the amount to be billed is known. Few cards allow such transactions and
those that do may withhold balances for up to 90 days. The amount held back is not available to the card holder for regular use
until either the transaction is cancelled or completed.
Prepaid card money does not earn interest
Amount loaded on a prepaid card does not accrue any interest for reason similar to that applicable to current account balances.
Such amounts are held (by banks and card providers) in a highly liquid pool that needs constant replenishing and hence are not
available to be lent.
Cost of convenience
The conveniences offered by prepaid cards do, however, come at a high price. Charges around card usage are plenty and add up to
a lot very quickly. Typically these charges apply to-
1. card activation
2. monthly maintenance
3. transaction
4. currency conversion
5. card loading/topup
6. ATM withdrawal
7. balance enquiry
8. lost card replacement
9. card inactivity
10. online bill pay setup
11. overdraft
Its quite clear that prepaid cards address requirements of a new consumer group and are here to stay. Their appeal, however, will only last if some of the ludicrous charges are done away with. In a world where consumer is king, there is no room for exorbitant fees.