Love Thy PrePaid Plastic

A friend in London called to tell me about the latest rage in Britain, a prepaid credit card.

Now, this is something that was launched here in the U.S., last year and sales of these cards have tripled to $1.3 billion. What are they, who buys them, how does it work?

Keep in mind that it's practically impossible today to make a purchase over the Internet or to even rent a car without a credit card. It's the way of the world. We are in a credit-based society. So, what happens if you don't have a credit card? For instance, how about people with a bad credit history? How do they get a card? Kind of impossible, except that now many lenders will offer prepaid MasterCards or Visas. They function the same as a regular credit card except that the concept is quite different.

The prepaid card is exactly what it says it is. You open an account and put money into the card. It can be your paycheck if you want. But in effect you are pre-loading this card with cash. And then you use it wherever MasterCard or Visa is accepted.

It's not difficult to get either because you are paying for it upfront. You fill out an application, pay a fee, and load the card to a certain amount. And, when you use it, you have no interest charges to pay because you are not borrowing any money. You're using your own money. Works just like a prepaid telephone card.

There are a few downsides here. They are not cheap. The set-up fee can be anywhere from $5 to $50 and then you pay a fee each time you put more money into the card. Compare that with regular credit cards, which for the most part are free of set-up charges or annual fees. Of course, interest charges do accrue on regular cards if you don't pay the balance in full within a certain period.

What's been happening in England, where Brits have always loved the use of plastic, is that according to Datamonitor, a market research group, the value of transactions made on debit and credit cards has more than doubled. They are finding that people are putting their wages into these cards and even make ATM withdrawals or online and telephone transactions. Naturally, there are no overdraft services.

Visa and American Express have been testing the waters in England with electronic versions of gift vouchers and travelers checks and according to Advanced Payment Solutions, which is launching the cashPlus card with MasterCard, some 2.4 million people in the U.K. are being targeted: those not having a bank account and who could benefit from such a card.

Back here, the Nilson Report says that sales of the cards have been successful primarily because of demand for them from immigrants and those with poor credit histories.

Of course, there are some problems that have already cropped up, certainly across the pond. Just last month the Office of Fair Trading said that fees charged by certain vendors were "unduly high" and represented a "tax on consumers." And the Competition Commission blasted away at store card providers for charging customers up to 20 percent more in annual interest rates than was warranted.

How this will all iron out is something waiting to be seen. But clearly as we all know, plastic is not the wave of the future; it is the present.