Glossary: Prepaid cards
A debit card that works in the same way as a pay-as-you-go mobile: you top it up with cash and then use it just as you would a normal debit/credit card. Although some are badged Visa and MasterCard, pre-paid cards are not a credit card; you can only spend what you load. Prepaid cards are aimed at people who might not traditionally hold bank accounts – children, teenagers, people with poor credit ratings, migrant workers, and benefit claimants – and there are no credit checks on the applicant.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.