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Considering Pre-Paid Credit Cards

Pre-paid credit cards are available from most banks and other financial institutions that offer standard credit cards to consumers. You can also purchase pre-paid cards at some large retailers. Although most consumers prefer to carry standard cards, a pre-paid card might be a valuable addition to your financial portfolio. Like other types of cards, these cards have both advantages and disadvantages.

Advantages of Pre-Paid Cards

This type of card is available to anyone regardless of credit history. This is because instead of the issuer extending credit to you, your purchase amounts are deducted from funds you load onto the card. If you do not have sufficient funds in your card account, the issuer will simply decline the charge request. Because you do not need a good credit score to qualify for a pre-paid card, this can provide you with credit card access even if you have made late payments or other credit mistakes on other accounts in the past.

It prevents you from accumulating debt that you cannot repay. Because you are limited to the amount you have loaded onto the card, you can ensure that your purchases will not put you in jeopardy of default. This can be a significant advantage if you are living on a tight budget and do not want the added expense of credit card payments and interest charges.

A pre-paid card reduces or eliminates the need for carrying cash. If your cash is lost or stolen, you have little recourse to recover your money – in most cases, it is gone forever. By carrying a pre-paid card instead of cash, you have a level of security to protect your money. If your card is stolen or lost, you would simply need to report the loss to your card issuer. The company would then freeze the account to prevent another person from accessing your available funds. Using a pre-paid card instead of cash also makes purchases more convenient – in most cases, you can check out more quickly with a card than you could by paying with cash.

Carrying pre-paid cards can shield you against financial disaster while you are on a holiday or business trip. It can prevent you from spending more than you intended so that you won’t worry about how you will repay your debt when you return home. Also, you have the ability to freeze the funds in the event of card theft or loss. Even if another person is able to make purchases with the card before you contact the issuer, your liability would be limited to the amount you have loaded onto the card. This can provide a safe way to access funds while you travel without the risk of a thief amassing exorbitant charges in your name.

Disadvantages of Pre-Paid Cards

Not all retailers and servicers accept these cards as payment. Typically, you cannot use a pre-paid card to pay for a car rental, airline ticket, or cruise ticket. Likewise, some utility companies do not accept these cards for invoices. Companies also do not accept these cards for services and products that must be paid for on an ongoing subscription basis. It is important to check with a servicer or retailer before you rely on a pre-paid account to pay for a purchase.

A pre-paid account might not help you build a solid credit history. Many issuers do not report timely payments to the major credit bureaus, which means that you do not have the opportunity to establish the credit history to qualify for cards, credit lines, loans, and mortgages in the future. This can be a significant disadvantage if you have not established a credit history or are attempting to repair your credit. Ask the issuer about reporting before you apply for a pre-paid card.

You will not have access to incentives and rewards available through standard card issuers. Some companies provide incentives such as cash back and rewards points to standard cardholders. Applying for a pre-paid card prevents you from taking advantage of rewards that could save you money or allow you to accumulate credits for special purchases.

Even with the disadvantages of pre-paid credit cards, the benefits make carrying this type of card worthwhile. At the very least, it gives you a convenient payment option when you don’t want to use a standard card for everyday or travel purchases.

Consumers Could Pay More if the European Commission Caps Credit Card Fees

The European Commission (EU) has threatened to cap the credit card processing charges that banks impose on businesses and shops. In turn, the banks have threatened to add higher fees and other charges onto cards used by consumers. When it all finally boils down, it’s likely that UK households will take another hit in their billfolds.

As it stands now, credit cards like MasterCard and Visa charge businesses a 0.9 percent charge on all credit card purchases. This credit card fee costs businesses £850 million annually. The charge in debit cards is 0.2 percent. The EU wants to set a flat service charge fee of 0.3 percent.

On further examination, this matter gets more complex. The fees that businesses pay to banks are known as interchange fees. These fees cover the bank’s costs of processing credit card transactions such as fraud insurance and administration. Shops and businesses give banks different interchange fees based on size. Big retailers generating tons of sales tend to pay a smaller interchange fee. A mom and pop store will pay a larger interchange fee. These fees can vary from 2.5 to 0.1 percent.

The European Commission (EC) estimates that this fee payment market has a value of £112 billion. The EC is laying out the argument that the credit card sector is expensive and fragmented. Retailers tend to agree with the EC opinion. The British Retail Consortium (BRC) has been hammering the EC for a decade to end what it calls excessive and anti-competitive fees for processing credit cards. The BRC argues that consumers will benefit via lower prices if the fees are capped. At present, retailers eat these fees and charge them back into the business.

“We’re delighted with this landmark proposal,” said Helen Dickinson, the BRC director. “Capping these excessive and anti-competitive fees will support the UK retail industry by £362 million a year, boosting the industry’s ability to invest and innovate while continuing to deliver lower prices and value for customers,” Dickinson added in an interview at Daily Mail.

MasterCard Europe contends that if this EC cap goes through, consumers will be hit with a £25 annual fee per credit card. Marion King, president of MasterCard, warned that lower fees will result in less income for issuing banks, and that will force banks to charge consumers for using cards.

The EC fee proposal will force credit card companies to separate their payment card schemes from the business division that processes transactions. Essentially, this would destroy the current credit card model. The Financial Times (FT) describes this matter as the final battle in the long war between EU bureaucrats and payment providers. The Commission proposal calls for a 0.2 percent cap on debit transactions. Credit card fees would be capped at 0.3 percent. The EC estimates that EU debit card fees will be cut to €2.5 billion from €4.8 billion. Credit card fees will tumble to €3.5 billion from €5.7 billion.