Although the economy has become more stable following the economic crisis of the early 2000s, Americans still have the highest debt-to-income ratios in the world. In the US, we have a variety of credit options and payment methods at our disposal, yet many continue to struggle with keeping their finances in order. Prepaid cards are just one tool people are turning to in an effort to get their financials in order.
Each year, consumers load billions of dollars onto prepaid cards—and people of all income levels are using them. Consumers see the cards as a way to manage their funds without the surprises that can come with back accounts. And for people trying to steer clear of debt, prepaid cards are one of the best alternatives. After coming out of a tough spot financially, many consumers just want to keep it simple. Using a prepaid card is one of the best ways to accomplish that.
Prepaid cards were once regarded as alternative financial tools used only by those who couldn't be approved for a credit card or who didn't have a bank account. However, in recent years, prepaid cards have gone from obscurity to one of the preferred ways to handle transactions of all kinds, for consumers of all income levels.
Read on to see how people have started to use prepaid cards to control spending and maintain their budgets.
Recommended by Finance Professionals
Consumers aren't the only ones who see value in using prepaid cards—many financial professionals recommend them to their clients as well. One reason prepaid cards are preferred by credit counselors is that these cards don’t make a bad situation worse. In general, you can’t spend money you don’t have with a prepaid card—the card allows you to use the money you’ve loaded onto it, and no more. Prepaid cards keep the consumer from taking on more debt while in the process of repairing their credit. If you happen to have a prepaid card that offers some form of overdraft protection, consider opting out of this feature, so that you can avoid overdraft charges and completely prevent yourself from spending money you don’t have.
For those participating in a debt management program, using prepaid debit cards also give consumers a sense of control over their finances, which can be valuable to those who have historically not paid close attention to day-to-day transactions. There’s no bottomless pit of debt to accidentally fall into when you’re using a prepaid card. Dealing with money can be very stressful, but knowing exactly where you stand with a prepaid card can relieve some of that anxiety.
Prepaid Cards for the Budget-Conscious
Whether you have always been careful with your money or are trying to become more budget-conscious, a prepaid card can serve as a good way to stick to a plan. For people who use the “envelope budgeting” style, which involves separating funds and allocating specific amounts for different purposes, using several prepaid cards is a great way to ensure you don’t overspend in any category. At the end of the month, it’s easy to see how much you spent and determine if you need to allocate more or less to a particular category in the future.
Better Than Credit Cards
On top of budgeting benefits, prepaid cards are also regarded as a better alternative to credit cards while still offering the same or greater benefits. Credit cards give consumers the ability to make purchases anywhere and to do things like reserve hotel rooms, set up recurring payments, or shop online. The only caveat: the customer is charged interest on whatever they purchase. For cards with high interest rates, these extra charges can add up quick. Consumers often find themselves inundated with multiple cards and thousands of dollars of debt. Prepaid cards do not charge interest, and consumers who have less than perfect credit do not have to worry about being denied. Additionally, prepaid cards are available at several national retailers and consumers can even register their card online for added convenience.
Critics of prepaid cards say that the fees can outweigh the benefits, but these claims are largely unfounded. Many prepaid card issuers offer several ways to avoid recurring fees, and card companies have historically been very transparent with fee structures. This is more than what can be said of banks, who often generate much of their revenue through hefty overdraft fees, many of which consumers are unaware of until it’s too late. The government has continued to keep a close watch on the prepaid card industry in order to protect consumers, and even with new, more restrictive rules, prepaid cards continue to be a favored option.
Although most prepaid cards don’t provide a way to save money, using them is a great step in the right direction. By keeping a closer watch on your finances and avoiding debt through the use of a prepaid card, you may be more inclined to examine your total financial picture in order to make positive changes.
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