This is one of those questions that some shoppers may not really be able to answer, even if they have used both kinds of card. This may especially be true because the prepaid and credit cards may look very similar and are both easy to use. You simply punch in your PIN number every time you want to make a withdrawal or purchase.
However, with a prepay card you only spend the money that you have preloaded on the card. So you cannot run up debt. With a credit card, every time you spend on it, you are borrowing money, which, if you do not repay it back when your monthly statement arrives, you could be charged interest on.
Where can the cards be used?
Both kinds of cards may bear a brand name (eg the MasterCard symbol), which may mean that they are widely accepted wherever the logo is displayed. Indeed, both types of plastic may typically be used to:
- withdraw cash from an ATM in the UK;
- withdraw cash from an ATM overseas;
- purchase goods and services online and over the telephone;
- make purchases in shops, restaurants, garages etc; and
- pay for bills.
So what are the other differences?
So far, the cards may seem similar. One of the main differences, then, may be in who can get a credit card or prepaid card, and how much each one may cost you.
The central difference here is that, as discussed above, credit cards are methods of borrowing money from a bank or card provider. Prepaid cards on the other hand only involve spending money that you yourself have loaded onto the card. There is no borrowing involved with a prepaid card.
Therefore the attitudes of the card issuers may be different. As a prepaid card user, you are merely spending money that you have already put on upfront. As a user of a credit card, you are spending money that you have not yet paid the card company. Accordingly this presents a risk to the card company that you may not be able to pay the money back.
Applying for cards
Given that there is no risk involved to a prepaid card issuer (as you are not borrowing money from them), there is typically no credit check to pass in order to qualify for one. On the other hand, non prepaid card providers may insist that you pass a credit check with flying colours so that they can have some confidence that you are likely to be able to afford to repay the sum that you have borrowed.
Finally, another significant difference between the two types of card is the way in which you may be charged for using them. Users of prepaid cards may typically be charged fees for performing particular activities, like topping up and making withdrawals. With prepaid cards such charges are transparent.
With credit cards on the other hand, the interest that is charged may drag on for months and months (and maybe even years) if you have not been able to pay it off quickly, making the purchases that you have made on them potentially very costly indeed!