One of the most commonly recommended strategies to prevent overspending is to leave your credit cards at home and only carry cash. Once the cash is spent, it’s impossible to make more purchases.  The problem with this is that cash is easily lost or stolen, and there’s little hope of ever getting it back.

How A Prepaid Card Can Help

The solution to this dilemma lies in technology; by using a  prepaid credit card, you can stick to your budget while still enjoying some of the theft and loss protections of a regular credit card.

A prepaid credit card actually functions more like a debit card than a credit card.  While a credit card allows you to make purchases using credit advanced to you – often in amounts well beyond what you can actually afford – a debit card is limited by the value of your bank account.  Furthermore, a credit card will charge you interest if you don’t pay your bill in full, while a debit card simply acts as a withdrawal from your account, so payments are unnecessary.

It is still possible to stray from your budget using a debit card, however.  A debit card allows you to spend literally every cent in your bank account, which you likely need for other expenses! Often you may even overdraw on your account, which not only depletes your funds but also results in overdraft charges.   

Prepaid cards, on the other hand, differ from credit and debit cards in that you can only use the money that you have loaded to your prepaid card.  The card provides no credit whatsoever, so when the balance in your prepaid card is spent, you cannot use it again until you reload it.

How Do Prepaid Cards Work?

First, you set a spending budget and load that amount onto your prepaid card.  You can do this in a number of ways – transferring funds from your bank account, having your employer direct deposit your pay onto the card, loading cash onto it at a major retailer, or transferring money from a PayPal account.  You may then use the card in brick and mortar stores, but you may also use it to make online purchases or to make payments on recurring bills.  If necessary, you may even use the prepaid card to withdraw cash from an ATM machine.

Prepaid cards are a great choice for people with poor credit or no credit history at all, since they don’t need to pass a credit check to qualify.  Prepaid cards won’t help users build credit history, but they can prevent people from digging themselves deeper into debt.  

When used over the long term, prepaid cards allow users to develop good spending habits and budget practices. Since it is impossible to make impulse purchases that can blow the budget, users learn to develop discipline when shopping.  This is especially helpful for teenagers; parents can limit the amount loaded onto the card and the teen is at no risk of getting into debt at an early age.

Prepaid cards do have their shortcomings. The biggest challenge with most prepaid cards are the numerous fees that issuers may charge you. These fees can range from reloading fees, bill payment fees, transaction fees, monthly maintenance fees, declined transactions fees, customer service fees, and even inactivity fees. Before signing up for a prepaid card, do your research and get a list of all the fees associated with the card. The best prepaid cards keep all these fees to a minimum and prioritize customer security when doing online transactions.

In a nutshell, a prepaid card can be a great budgeting tool that helps you stick to your budget and teaches you to spend within your means.

Have You Tried Using a Prepaid Credit Card?