Cashless payment has become the norm in our everyday lives. The convenience and hygiene benefits of only handling your own card, plus not having to carry around change all day, far outweigh those of carrying cash.
As more and more people adopt contactless and cashless ways of paying, the choice of which card to use for which payment becomes a little more complicated. Each type of card has its benefits, but what is the difference between a prepaid card and a credit card? And when should you use one versus the other?
If you’re still wondering if a prepaid card is the same as a credit card, our useful explainer has you covered. We’ll put to bed the prepaid card vs credit card debate and help you decide which is best for managing your money.
Adding vs borrowing money
Credit card spending is effectively borrowing money that you then repay. Typically, credit cards will incur a rate of interest and if you do not pay your balance in full each month, you could end up owing a lot more than you have spent.
Prepaid cards on the other hand incur no such interest and don’t require repayment. All you need to do is add your own money to a prepaid card. As you make payments with your prepaid card, your total balance will reduce. This makes prepaid cards great for not racking up huge bills, as you only spend what you have.
You Can’t get into Debt with a Prepaid Card
Spending on a credit card essentially racks up debt in your name. This isn’t an issue if you can regularly make large repayments or pay your balance in full. If you continually overspend and max out your credit limit, this could leave you with a huge amount of debt.
On the other hand, prepaid cards do not incur debt and help you budget effectively. You can’t spend more than you add when you use a prepaid card to make payments. This is ideal for people who want to stay debt-free or need to manage their money properly to pay off other debts.
When you apply for a credit card, the credit facility or bank you apply with will run a hard credit check on you. This shows up on your credit report and can negatively impact your credit rating if you aren’t approved.
Additionally, if you have a poor credit rating or no credit rating, you are unlikely to get approved at all. This makes credit cards exclusionary for younger people, newly settled residents and those with a history of debt.
Conversely, prepaid credit cards do not require a credit check as they are not attached to a credit facility. Signing up for a prepaid card account will not have a significant impact on your credit rating. This makes them perfect for people who want to take control of their finances and keep their credit rating in check.
Credit cards can be linked to your personal bank account or provided by independent credit card providers. Linked credit cards can be advantageous, but if your credit card is with a separate banking institution, it could make managing your money more complicated.
Prepaid cards do not need to be linked to any bank accounts, but still offer a wide range of services to help you manage your money effectively. Suits Me’s prepaid card offers several handy services, including a mobile banking app, sort code and account number and the ability to set up Direct Debits.
One of the biggest attractions of credit cards is that they have long-established protections. This means they come with added financial security if you’re a victim of fraud or a company you’ve made a payment to dissolves.
It is important to note that prepaid cards are also regulated by the Financial Conduct Authority (FCA) and governed by strict financial protections too. Prepaid card providers must be authorised as “E-Money” institutions before they can offer prepaid cards to consumers. This gives prepaid cardholders and their money legal safeguards.
Sign up for a Suits Me prepaid card to make the most of our additional banking features, manage your spending more closely, and avoid the costly penalties using a credit card might incur.