Prepaid debit cards to control spending

by Manshu on October 7, 2009

in Credit

I wrote about the pros and cons of prepaid cards a few months ago, but at that time I missed out two prominent reasons why people get a prepaid debit card.

My initial feeling was that a large majority of prepaid debit card holders are simply unable to get a credit card or open a regular bank account with a debit card. But apart from that – there are at least two big reasons why people go for a prepaid debit card.

1. Control spending: Many people who have had debt problems in the past choose a prepaid debit card because it keeps a check on their spending. It is far better than using a credit card because there is no control on how far along your debt can go. It is also slightly better than using a debit card, because if you are in the habit of going over limit, then overdraft fees can kill you with a bank debit card.

Prepaid cards don’t allow you to overdraw, so there isn’t much risk of an overdraft fee in most cases. However, prepaid debit cards may charge you a decline fee, which is charged if you try to make a purchase which overdraws your funds. If you shop around though, you can get a card, which has decline fees in the single digits (much lesser than overdraft fees of most big banks).

2. For their Teens: Parents use prepaid debit cards to give their teens the convenience of a plastic card, while retaining some control over their spending. A prepaid debit card is easy to fund, and while it does have fees that you wouldn’t normally pay with a debit card, the up side is that there are limits to what your teens can spend, so spending can be kept under checks. Some prepaid cards come with features that allow you to set daily limits or exclude transactions from certain categories of places. This is a useful feature to have if you are using such a card with your teens.

These are interesting uses, but you should be aware of the flip sides of such a product too. The obvious ones are all the fees and expenses associated with prepaid cards.

Then there is the subtle issue of not attacking the root of the problem. If you are using a prepaid card because it forces you to control your spending, you are not really altering your behavior, which gets you into trouble in the first place. Prepaid cards are a good start to get control over your spending, but ultimately, you should strive to reach a position where you have credit cards without worrying about getting in debt.

{ 1 comment… read it below or add one }

Kim_Mango December 26, 2009 at 1:40 pm

I agree with the author that a big reason why people decide to get a debit card is to control spending. I’ve recently started freelance writing for a MasterCard debit card called, Mango Money.

At first I didn’t really know how it would fit into my lifestyle. I have good credit, a checking account, and do pretty well budgeting. I decided to give it a try and quickly realized that by loading my monthly spending money on the card, I could budget that aspect of my money better.

Unfortunately this month I didn’t do so well. I have more month than money so I’ll have to focus on doing a better job next month.

Be careful though, not all prepaid debit cards are created equal. Choose a debit card that has the least amount of fees. If you educate yourself upfront on how the card usage fees work, you won’t experience unexpected surprises later!

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