Prepaid Cards Can Offer Pre-Portioned Spending for Consumers

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Due to recent data breach scares and security concerns, some Americans are looking beyond the traditional credit or debit cards for payments and purchases. According to a CNN article, one option that’s garnering increased attention is the prepaid card.

A prepaid card works in much the same way that a debit card does. You swipe your card and enter a pin in order to complete your transaction. The difference is that the prepaid card isn’t necessarily attached to a bank account and has been specifically preloaded with an amount of your choosing. When the card is spent, it’s spent – no overdraft fees involved and no potential for financial fraudsters to clean out savings from an account.

Sounds great, right?

Well, yes, but only under certain circumstances. They present a viable alternative for some, but monthly maintenance fees along with transaction fees don’t necessarily make it a cheaper option. In addition, they aren’t guaranteed to be safer than swiping your debit card. Because they’re less regulated, they offer less consumer protections and their terms are also widely variable.

Reasons people use prepaid debit cards

Because you can obtain a prepaid card without opening a bank account or undergoing a credit check, the prepaid card has become a tool of the unbanked or underbanked. It’s an option for anyone wishing to steer clear of banks or who can’t qualify for an account.

However, there are some prepaid cards holders who use them to supplement their current checking account with an alternative spending option. Because the cards limit the amount that you can spend to whatever balance you put on the card, prepaid cards provide an “overspending barrier” and protect you from overdrawing from an account with insufficient funds or going into debt (as with a credit card).

These cards are also sometimes issued by businesses who pay for employee expenses. To cover and track costs of a business trip, for example, they’ll give their employee a prepaid card rather than give them cash or relying on an expense report.

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Are prepaid cards safer?

While prepaid cards have been around for a while, they’re beginning to draw attention from people seeking potentially safer alternatives to credit cards. But, that’s not to say that their recent popularity is tied to increased safety. They aren’t without their drawbacks and you should be familiar with the terms and potential fees before setting one up. They also don’t carry the same protections as credit cards which means that if you have your prepaid card stolen or you lose it, you may not have the same liability protections to look forward to. Imagine walking around with 500 dollars in cash and treat your prepaid card as such.

Best of both worlds

One of the most appealing things about a prepaid card is that when the balance shrinks to nothing, that’s it. Transactions attempted after that point will not go through, thus protecting you from overdrawing from an account with insufficient funds. It’s a handy protection, but ideally, something that can be replicated with a traditional bank card and proper balancing and budgeting. For example, tracking exactly how much is in your regular bank account allows your to avoid withdrawing or making purchases above your balance. Though that requires due diligence to your purchases and (often) self-control when it comes to your spending, it’s good habit that can be sustainable long term.

If you find the idea of prepaid card appealing then you might consider another kind of portioning tool in the form of a retail gift card. While you won’t cover all your expenses (a gift card for your laundromat probably doesn’t exist… and might never) gift cards can be useful for things you know you regularly buy like groceries, coffee or gas.

Prepaid cards don’t represent the only way to portion your spending and the attached fees can actually end up costing you money you would have otherwise saved. Ultimately, you want to protect yourself, avoid fees, and maintain a sense of control over your spending and your finances. While these are all achievable things, they require preparation and organization. Before taking out a prepaid card, explore all your options and make sure that you have read all the fine print attached to the card.

The New York Times also wrote about this topic, predicting that prepaid cards may be on the rise and warning against some of their vulnerabilities. Do you agree? Share your thoughts below!

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