Living without plastic is hard, but switching to prepaid cards can help you avoid debt and teach you how to live within your means.
Network branded prepaid cards provide users with the flexibility, convenience, and protection of a MasterCard or Visa credit card, combined with the financial reality of spending only money that is actually available at the time, as the user would spend cash.
Prepaid cards have become increasingly popular budgeting tools for both credit cardholders and those who don’t have credit cards, says Jennifer Tramontana, director of communications for the Montvale, N.J.-based Network Branded Prepaid Card Association (NBPCA), the three-year-old national trade association that represents the network branded prepaid card industry.
“Today, with access to credit potentially being an issue for some people, certainly we’ll probably see these cards become more popular, just among the mainstream population, in terms of access to a branded card that doesn’t necessarily require a credit check, because you put your own funds on it,” says Tramontana.
Studies support Tramontana’s prediction. A November 2008 research report on the prepaid industry from Mercator Advisory Group — an independent research and advisory services firm that focuses on the payments business — predicts that the total for load volume (money added onto prepaid cards) across all prepaid market segments will reach $362.3 billion by 2011. The report says network branded solutions will represent more than half of that total, with a predicted $124.6 billion in load volume.
NBPCA’s recent study, entitled “Survey of American Consumers: Reloadable General Purpose/Payroll Prepaid Cards,” which surveyed 600 U.S. consumers with annual incomes under $50,000, indicated an overwhelmingly positive response from those consumers who were also current network branded prepaid card users: 90 percent of network branded prepaid card users said they were satisfied with their prepaid card experience, while approximately 70 percent of prepaid card users said they were “extremely satisfied” or “very satisfied,” says Tramontana.
|Are prepaid cards right for you?|
|Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, and 23-year veteran of the credit counseling industry, says she thinks prepaid cards could be useful budgeting tools for some people.|
“I think that consumers really have to know that they have a choice, and if they decide that this is the correct budgeting tool for them; that it meets all of their objectives, such as being able to not carry large amounts of cash with them, to be able to use credit, etc., while controlling their spending, then they’ve got to know, in the fine print, are there going to be hidden fees that are absolutely going to come back and bite them?” says Cunningham, who says that consumers with limited incomes may find the prepaid card’s fees too costly to be truly valuable.
Jennifer Tramontana, director of communications for Network Branded Prepaid Card Association, adds, “Make sure you read all the terms and conditions, just like you should with any credit card or debit card you get. Read them — make sure you completely understand them. If you have any questions, make sure you ask upfront.”
How prepaid cards work
Consumers can apply for and load funds onto reloadable prepaid cards online, at financial institutions or at retail outlets. Once the cards are loaded, accessing the funds is as easy as swiping the card at an ATM or using it anywhere that network’s cards are accepted.
Prepaid cards give you the flexibility to shop online, rent a car and conduct any other transaction that requires plastic — provided you have the cash to back up any deposit on the prepaid card. “It does become difficult to travel, rent a car, book a hotel room, make any guarantee on a purchase, make a purchase online, without some form of credit card,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling and 23-year veteran of the credit counseling industry.
Fees may be assessed when you activate or reload your card and when you make a transaction. Weekly or monthly charges are also possible and can range from $1 to $10 or more, depending on the card, though some cards offer free unlimited transactions, reloading and more with paycheck direct deposits.
Just as banks offer a variety of checking account services and options, so do the issuers of prepaid cards. That means consumers must shop around for the card that best fits their needs, says Tramontana. “This is a financial services product, and as we’re all used to, various financial institutions offer different packages for their products and services. Prepaid cards are the same way — each offer different features, different benefits, and a different fee structure. We encourage people to shop around before they pick a prepaid card to find one that suits their lifestyle. Some people would rather pay a higher upfront fee, and then have no transaction fees. Some people know they’re only going to do one transaction a month, and they’d rather pay a transaction fee. Some cards come with personalization and other benefits; it just all depends on the consumer,” says Tramontana.
Here are 10 top ways to budget with prepaid cards:
- Save on interest charges and over-the-limit and late fees by switching from a credit card to a prepaid MasterCard or Visa prepaid card. Elise Young, 31, from O’Fallon, Ill., is a medical transcriptionist and a prepaid Visa card user. She began budgeting with prepaid cards almost a year ago. “I like the idea of a prepaid card more than a credit card because I’m not getting myself deep into debt, and I’m not paying thousands of dollars a year in interest charges,” says Young. “I also don’t have to worry about the impact that carrying a lot of credit card debt might have on my credit score.”
- Use prepaid cards instead of checks, and avoid those $45-a-pop overdraft charges. Enter your prepaid card number online in the same way you would use your credit or debit card to pay a bill. “It’s better than sending a check because I don’t have to worry about us accidentally overspending our checking account before the checks for bills can clear. I even like it more than paying by recurring automatic debit from my checking account because I know the money is on the prepaid card when I sit down to pay a bill,” says Young.
- Budget toward your bon voyage. “This year, my husband and I have been putting $50 onto a specific prepaid Visa every time each of us gets paid. That card will only be used for our trip, and best of all, we won’t come home to an exorbitant credit card bill that we’ll pay for months,” says Young.
- Use prepaid cards in lieu of cash. Sure, the “envelope” system of budgeting — in which a set amount of cash is divided between envelopes for budgetary needs — is popular, but it’s also risky. “It’s not extremely safe to carry around $500, $800, in your pocket, so I think from a safety perspective, you’re better off having a branded payment card,” says Tramontana.
- Track your spending with your prepaid card and receive daily balance alerts via e-mail or over your cell phone. “Previously, when we used cash, we would spend through it really fast and not have any idea where it all went. Now that we can see it on the computer screen, it’s easy to see where our money is going and where we can cut back,” says Young.
- Create a living expenses budget, loading $30 to $50 a week onto a prepaid card for workweek lunches, mid-morning lattes, and snacks. Once that money is gone, it’s time to brown bag it and drink the bitter dregs in the lunchroom.
- Limit your spending by adding only the money you have budgeted for specific purchases — say, $600 a month for groceries, and $400 a month for restaurants — onto the designated prepaid card. “If we put $200 on our prepaid card for groceries, we know we have to make it last until our next payday. If we have $50 budgeted for restaurants and we spend it all, we know that we’re not going to be eating out again until we get paid,” says Young.
- Load your kids’ allowances or college spending money on prepaid cards to teach them smart money habits and allow them to graduate college without crippling credit card debt. “This is a great tool to teach them how to budget and spend for the Facebook generation. This is how transactions are done today, and it’s a great, safe way to teach younger people in your family about budgeting and spending effectively,” says Tramontana. Plus, both you and your child get to see how and where the money is being spent.
- Keep nosy credit card companies in the dark about “questionable” charges by using your prepaid card (in lieu of a credit card) at secondhand clothing stores, tire retread shops, casinos or anywhere else your credit card issuer might frown upon. Credit card issuers increasingly are using purchasing data to determine whether you are a good credit risk or not. This purchasing data can then be used to increase your credit card’s interest rate, reduce your credit limit or both. For example, if you used to use credit cards to shop only at high-end stores but have had to cut back and now use your credit card at Goodwill and Wal-Mart, your credit card issuer is watching. To protect your credit, you may want to switch to cash or prepaid cards instead.
See related: Compare features, fees of prepaid cards, What electronic payments reveal about you to lenders, FDIC: Prepaid cards qualify for deposit insurance, Debit and prepaid cards ease medical bill payments, Consumer groups ask FDIC for prepaid card protections