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Using Prepaid Credit Cards to Budget Expenses

December 28th, 2009 · 5 Comments · Budgeting, Credit Cards

by Kristy Welsh

(Last Updated On: March 31, 2011)

New Year’s Day is just around the corner – is one of your resolutions sticking to a budget? Prepaid cards may be a helpful tool.

We’ve previously blogged about prepaid cards being the choice for many without the credit to get a credit card or even a checking account. Prepaid cards seem to be gaining in popularity – even for people with good credit.

I have to admit, I’ve thought about using one of these cards myself, as sometimes it’s just too easy to pull out the credit card and pay for something on impulse. Like anyone else, I’ve cringed after opening at least one credit card statement.

If you’ve at least taken the first step in managing your money, you know how much you’re spending on things like gas, rent, food, insurance, entertainment. The next step is committing to a budget. Why not make it easier on yourself and get a separate prepaid card for each type of expense?

Sometimes it’s hard to budget and keep track of expenses. If you’re having a stressful day, it can be hard to calculate on the fly at the grocery store how much of your food bill you have left to spend at the checkout counter. If you have a prepaid card, when the money is gone from that card, you just stop using it for the month.

What if you run out of money on your food card and you’re only half way through the month? We’re not recommending that you starve your family. Given your experience, though, you might find ways next month to economize and make that food budget stretch out a little further. If nothing else, you may realize how fast you are going through your money and that kind of awareness is beneficial.

If you do decide to go the prepaid route, you have to be aware that there are strings attached with using them, in the form of fees for using and loading the cards with cash. Before you get one of these cards, you should do a cost comparison: are credit card interest and fees more expensive than prepaid cards? Here are some of the hidden traps:

  • Sign-up or Start-up fees
  • Transaction, POS, or Usage fees
  • ATM Withdrawal fees
  • Monthly Maintenance fees
  • Reloading or Recharging fees
  • Balance Inquiry fees
  • Monthly Statement fees
  • Cancellation/Refund fees
  • Insufficient Funds/Overdraft fees

Of course, the optimal solution is to spend only what you can afford without going into credit card debt. But if you feel you need a little help, prepaid cards may be a cheap tool to use.

How about you? Have you used prepaid credit cards to your advantage? Tell us about it by leaving a comment!

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5 Comments so far ↓

  • Jim Gaudet

    Hey, this is a great idea. Most people I know do now want to get a cash card, but this is a good idea. Since you are paying these bills already, might as well get some credit for it.

  • Kristy

    Jim, what kind of credit are you talking about? These won’t show up on your credit report…

  • Nancy Tossell

    I’m glad you listed the possible sources of fees that can come with prepaid cards as they can really add up if the consumer is not careful. It is also important to note that prepaid cards are not automatic. We had a client who was turned down by Bank of America for a prepaid card and he is gainfully employed! Needless to say, we were amazed.

  • Patrice Peyret

    While it is pretty obvious that prepaid cards are cheaper than credit cards, they are also more cost-effective to use than checking accounts (which typically come with ATM cards).
    Many banks require a minimal balance to open a checking account. Also, many banks have imposed abusive overdraft fees on their so-called “free” checking accounts, making then hugely expansive whenever a mistake is bing made.

    By definition, prepaid cards should never overdraft.

  • Kristy

    But some prepaid cards will allow overdrafts. Some of them. As far as being cheaper than a credit card – you have to weigh all the fees. Prepaid cards can be a trap.

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