Prepaid Credit Cards: Friend or Foe?
To many Malaysians, prepaid credit cards may still seem like a fairly foreign financial tool.
But the fact that they are now offered by a number of financial institutions in our country is a testament to how quickly they are growing in popularity, which would make not knowing a thing or two about them and how they work a big mistake.
More importantly, you should also familiarise yourself with the circumstances under which a prepaid credit card could be a great ally – and those under which its usage would be strongly discouraged!
What is a prepaid credit card?
Think of it a portable value store of sorts, akin to prepaid mobile phone lines.
You begin by loading money into the card, usually at an Automated Teller Machine (ATM) or through the online portal of the financial institution that issued your card.
All payments made using the card will then be deducted directly from the amount of money that was loaded into it.
This is in contrast to traditional credit cards, which operate by first charging the financial institution which issued your card for your transactions and payments. You would then need to pay the amount owed to the institution within a specific period, or risk having to pay additional interest charges as well.
However, prepaid credit cards and traditional credit cards share some similarities as well – with the main similarity being that both cards can be used at all counters which display a MasterCard or Visa sign that matches that on your card.
Both cards can also be used to complete transactions with the same card-reading terminal, so you do not have to worry about looking out for shops or counters that have terminals which are dedicated especially to prepaid credit cards.
Does it have additional features?
Unlike credit cards, many financial institutions that offer prepaid credit cards – like Aeon Credit Service and its AEON Prepaid MasterCard – do not require applicants to have a minimum annual income level. The cards are also commonly available to those who are aged 18 and above.
Additionally, a prepaid credit card may be used to withdraw money from ATMs, although the money will not be drawn directly from an account and will instead be taken from the amount of money that was loaded into the card.
For withdrawals made using an ATM of the issuing financial institution, no additional charges are imposed, while withdrawals made through the VISA and MasterCard networks at the ATMs of other institutions may see a substantial charge being imposed. Performing the latter using a Sogo-RHB Prepaid Card incurs a charge of RM8.48, for instance.
This does not mean that you do not need to open an account with a financial institution to obtain a prepaid credit card, however.
You will still need to open a savings account with the institution at the very least and deposit a fixed sum of money into the account. This sum will then be used to determine the credit limit of your prepaid credit card.
Friend or foe?
Now that an understanding of the basic operation principle of prepaid credit cards has been established, it should be apparent that like credit cards and debit cards, it would generally be difficult to classify prepaid credit cards on either end of the ‘Friend or Foe’ spectrum.
For individuals who do not have the comfort of being able to freely spend large amounts of money at one go or would like to keep close control of their finances, having a prepaid credit card could be a blessing, as it would allow you to spend money that you actually have at your disposal when carrying too much cash would not be recommended.
This makes prepaid credit cards a good tool for students to have, for example, as they can use the card for emergency situations where paying in cash would be unfeasible – with a limit that has been set based on the amount that was loaded into the card.
On the other hand, prepaid credit cards may not be a useful financial tool for individuals or business who commonly make transactions involving large sums of money. Using a prepaid credit card in this instance would mean that they will have to constantly visit ATMs or log-in to their online bank portals to continuously reload their cards.
This is especially the case because prepaid credit cards normally have a maximum limit in terms of the amount of cash that can be loaded into them, and this limit is usually RM10,000, less any pending charges on the card.
As such, what it all boils down to is the purpose for which you need the card and your current spending habits. Once both have been accounted for, you would have a better idea on which card would match you best – a prepaid credit card, or a traditional credit card.
If prepaid credit cards are not suitable for you, then you should consider how conventional credit cards will suit your lifestyle better.