Prepaid? Cash? Or Credit?

by Kristina on October 7, 2010 · 5 comments

Considering the current economic situation, personal financial situations, as well as the high interest rate of most credit cards, many people are choosing to live on a cash budget.

This means that consumers prefer to pay by cash or by debit card for their purchases; as oppose to paying with a credit card.  Not having a credit card can be great for your monthly budget and spending habits.  However, not having a credit card can be inconvenient for major purchases, travelling needs, as well as establishing or rebuilding our credit history.

Most credit cards offer additional travel and medical insurance which is very helpful to travellers in case of a flight delay, lost baggage, or medical emergencies.  If we use our credit cards to purchase electronics such as televisions and stereos usually we are offered an extended warranty on our item at no additional cost.  Unfortunately, these benefits are not an option when using prepaid credit cards.

A prepaid credit card is almost the exact opposite of a traditional credit card. A prepaid credit card is the perfect balance between the money in our bank accounts and the payment option of a traditional credit card.  A prepaid credit card is loaded with actual money prior to making purchases.

The amount on a prepaid credit card is not credit, it is loaded with our actual money via an online service, and it is a money transfer from our bank account to our prepaid credit card.  Some people refer to this as “downloading” money.  It is almost as if you are making a payment to your credit card. But, instead of paying off a balance owing, we are creating a spendable balance.

We can use our prepaid credit card in most stores. We simply swipe the card to make a purchase, just as we would swipe our MasterCard or VISA card.  The money on a prepaid credit card is spent until there is no money left, this is similar to a regular credit card accept the money is not owing since it is not based on credit.  A prepaid credit card offers the peace of mind knowing that nothing is owed along with the convenience of paying with a credit card. It is a balance between the money in our bank account and the usage of a credit card.

Most online companies as well as stores accept prepaid credit cards.  However, some merchants such as ITunes do not yet accept prepaid credit cards.  Prepaid credit cards are also not yet accepted to purchase the applications for our IPhones and new IPods.

Prepaid credit cards do not affect our credit score or our credit history. They are a convenient method of payment but unfortunately they do not help establish or rebuild a credit score.  If you are looking to build or rebuild your credit score the best option would be to apply for a secured credit card.

A secured credit card is guaranteed by a term deposit, therefore if a client defaults on their credit card payments the bank can use the guaranteed term deposit to pay off the balance owing on the credit card.  They are often used to establish credit for new arrivals into a country, students, or people who want to rebuild their credit score.

Consumers can view a prepaid credit card as a universal gift card that we can use (almost) anywhere.  Both VISA and MasterCard currently offer prepaid credit cards.

(Photo By SZlea)

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{ 5 comments… read them below or add one }

1 Carol@inthetrenches October 7, 2010 at 11:46 am

Thanks for the post. I will be needing to have availibility to pay for some things on-line but don’t have or want a credit card. What is the difference between a prepaid credit card and paypay pal account? Which would acheive the objectives the best?

2 Dirac October 7, 2010 at 1:06 pm

I am still stunned that so many people are so irresponsible that they cannot have a credit card or they fear them. It is sad that the mere availability of money is too much.

I use a credit card for everything…pay it off every month…use the points to fly home for the holidays for free. Really, there is nothing more economically sound than that. It is getting difficult to read financial blogs and see so many people thinking/believing credit cards to be bad. Credit cards are not bad…people are stupid.

3 Carol@inthetrenches October 7, 2010 at 3:11 pm

The essence of freedom is to be able to select our own best option (within moral boundries) without being belittled, maniplated, or bullied by others.

4 Kristina October 7, 2010 at 10:28 pm

Hi Carol,
Although Paypal is a great method of payment, it is not yet offered/accepted by all online vendors. Credit Cards are a more widely form of payment. Also, Paypal can have a credit card or bank account as the sources of funds. Whereas, a prepaid credit card is purchased with cash or by a debit card. I hope this helps.

5 Carol@inthetrenches October 8, 2010 at 1:12 am

Thanks Kristina!

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