Tight Credit Standards & Prepaid Cards vs. Gift Cards

Consumer credit evaluation methodologies and systems are being continually improved by credit card companies as well as bank and other financial institutions. This is allowing credit standards to be raised and more stringently enforced. As a result, more people are failing to meet those standards. The rate of credit card application failures is increasing.

Consumers are increasingly confronted with a prepaid cards vs gift cards choice. There are substantial differences between the two.

Similar to debit cards, prepaid cards are a close alternative to credit cards. Gift cards are also a popular, even if a somewhat less similar, alternative.

A prepaid card is, in effect, a prepaid credit card. Like any other prepaid service, the consumer has effectively deposited funds in advance of a purchase. In that sense it is closely aligned with a debit card which is backed by a cheque account. Both cards have the backing of previously deposited cash. A prepaid card, like a debit and credit card, is titled to a specific individual.

A gift card is also prepaid but it is not titled to a specific name. Any individual can use a gift card.

Acceptance At Point-Of-Sale

For most people, the prepaid cards vs. gift cards decision is determined in favour of prepaid cards because of their generally wider acceptance.

A prepaid card is generally accepted at most locations where debit or credit cards are accepted (although there are some exceptions as explained below). Since a prepaid card is titled to a specific individual, that individual needs to authorise a purchase by signature, as in the case of a debit or credit card.

By comparison, gift cards are only accepted within a limited domain. Open loop gift cards are usually issued by a bank, a credit card company or other major financial institution. These gift cards can be used anywhere within the domain specified by the issuing institution. The extent of that domain will vary according to the success of the issuing institution in negotiating agreements with retail outlets.

The closed loop gift cards are issued by a specific organisation and may only be used at locations operated by that organisation. For example, large department stores and restaurant chains typically make available for sale gift cards that can only be used by customers within that store at any of its locations.

Another important limitation applying to gift cards is that they usually have a specified life after which they become invalid even if a credit balance exists.

Because of these features, gift cards are often referred to as localised or limited domain cards with a limited shelf life.

Similar to prepaid cards, gift cards may be recharged and reused.

Three Types of Prepaid Card

There are three types of prepaid cards:

  • Closed system prepaid cards can only be used at locations operated by the issuing merchant. They are limited domain cards and are in this regard identical to gift cards.
  • Semi-closed system prepaid cards can be used relatively more widely since they are issued by a collective of merchants rather than one individual merchant.
  • Open system prepaid cards can be used at any location and in this regard are most comparable to debit and credit cards.

For most people, the prepaid cards vs. gift cards decision really boils down to what their names imply. Prepaid cards are convenient for general use at a wide range of establishments. Gift cards are used mainly as gifts.