There must be an alternative to those pre-paid credit cards

It’s as important for social care staff to help clients avoid extortionate credit deals as it is to maximise their benefit income

Benefits advice these days has to be seen in context and is for ever changing. I’m old enough to remember campaigns for extra money for daily baths and extra laundry costs.

And now the latest change of direction in advice work is taking place – it involves looking at expenditure, not just income. This doesn’t mean we’re dishing out patronising leaflets telling low-income families how to cook a nutritious meal for four people using only lentils, house-dust, wood chippings and a slow cooker. Instead, it’s all about how we stop people being ripped off, conned and confused by a rapidly changing financial marketplace.

For example, it was only a few years ago that we saw the launch of pre-paid credit cards, which users “loaded” with money before using them. Intended to offer credit card-style advantages without the risk of running up large debts, these cards looked at worst benign and at best a positive step forward for low-income users.

But at least some of these cards may not be such a great deal after all. Some card suppliers are promoting themselves heavily in low-income areas to people who historically would have found it difficult to obtain credit. They have been persuading benefit claimants to request that their weekly payment be paid straight into the card account instead of a bank, building society or post office account.

Although most banks can offer basic banking facilities to customers, many will not offer a debit card to those with a bad credit history. A pre-paid credit card is therefore the only way these customers can shop online.

One such card costs £10 and there is a £7.50 annual management fee. If that wasn’t bad enough, it costs between £1.25 and £2.50 just to have benefit loaded on to this card and the same charges apply for each cash withdrawal. This can soon mount up to a 15-20% levy on benefit income. This information isn’t hidden from the prospective customer when they request the card, but it’s not exactly prominent either.

Sales rely to an extent on customers’ relative ignorance of both new and established financial products. It’s why legal “doorstep lenders” can charge interest rates of more than 300% APR; it’s why cash machines in shops in low-income areas can charge £1.75 on each withdrawal; it’s why some companies that supply household goods offer those goods on credit without credit checks, but only at an extortionate price.

One such company has, on its website, a sofa for sale that costs £1,450 – a fairly hefty price anyway, compared with other suppliers. Paid for over three years, the cost rises above £2,100 (29.9% APR). With the “optional” service cover, the total price leaps to £2,650.

You could argue that these services and companies are meeting a need, at a price, for people who would otherwise have no access to mainstream financial services.

But what if there is an alternative – such as credit unions? And what if as much time, effort and marketing were put into promoting financial literacy and capability as is put into these commercial products?

It’s a big leap for the advice and social care sector to take on this role: educating our clients (and perhaps ourselves) about APRs, credit deals and basic bank accounts will not be easy. But if we don’t, are we simply leaving a job half-done – maximising someone’s income simply to see it swallowed up by rapacious and manipulative financial service providers?

Gary Vaux is head of money advice, Hertfordshire Council. If you have a question for him, e-mail mithran.samuel@rbi.co.uk

This article is published in the 25 February 2010 edition of Community Care magazine under the headline There Must be an Alternative to Those Pre-paid Credit Cards