Americans are known to be spenders. We embody the perfect consumerist society because of how extravagantly we spend out money. Living within our means is difficult to do because we are trying to keep up with our neighbors – even when it is beyond our means. This is why we all need to become smart spenders.
But being a smart spender goes beyond just choosing what you will buy. You also have to choose how you will pay for the purchases that you make. There are many purchasing tools that you can use: cash, credit , debit and prepaid cards. They all have their pros and cons and you need to choose wisely what you will use among them. Make sure that you will choose the purchasing tool that will complement your spending lifestyle.
Americans have chosen their favorite payment choice and the winner are cards – or debit cards specifically. But did you know that another type of purchase tool is gaining popularity? Prepaid cards have started to gain the spotlight and while it is still not as prominent as cash, debit or credit cards, it is still gaining ground as a reliable purchasing tool.
Difference between prepaid, debit and credit cards
Before we dwell on the statistics, let us define the difference between a credit card, debit and prepaid card first.
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Credit Cards. These cards are the most notorious of them all. It is one of the reasons why people got into so much financial problems the past couple of years. This card allows consumers to borrow money so they can buy items. Unless you have reached the credit limit, you can still buy items through this card. You can pay the balance of your purchases in installment. The catch is, you will pay your dues with interest – which is quite high. Any carry over balance is usually imposed with finance charges.
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Debit Cards. Most parents who want to introduce cards to their college kids use debit cards. Unlike credit cards, you borrow money when you make a purchase. For debit cards, you put money in the account before you can use it. When that money runs out, you have to put money again in the bank account. That way, consumers are protected from debt – because they are practically using cash. But at the same time, the money is protected from being taken by thieves.
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Prepaid Cards. Also known as stored value cards, these are similar to debit cards but there is no bank account required. When this card does not have money, you cannot use it. One kind of this card can only be used once. Another kind can be reloaded so you can put money into it every now and them. These cards are still provided by banks but it is usually for those who are not qualified to open bank accounts.
An infographic from NilsonReport.com shwos that the percentage of these three cards are as follows: credit (53%), debit (43%) and credit (4%). While the prepaid cards are dismally small compared to the other two, it has to be noted that it grew 211% in 5 years (2007-2012). In 2002, the prepaid expenses were at $9 billion. In 2007, it grew to $49 billion. In 2012, it rose to $152 billion.
Study reveals an increase in the use of stored-value cards
The Nilson Report is not the only study that revealed this increase. The PEW Charitable Trusts released a report that showed how these prepaid cards are now more accessible and sometimes even more affordable than checking accounts. That is what makes reloadable cards more popular in recent years.
Based on the data provided in the PewStates.org news room, prepaid cards are relatively new purchasing tools. Their data observed that in 2012, $64 billion was loaded into these cards. According to the report, consumers are preferring this over credit cards because it helps them control their spending. However, while this card is typically not in danger of data breaches like debit and credit cards, it still lacks protection from the government in terms of regulations and laws.
The highlights of the report also includes the following data:
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More banks are offering these prepaid cards to consumers by banks.
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Prepaid cards are usually offered with a better deal in terms of costs – especially when compared to those of checking accounts.
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Not all prepaid cards are covered by the FDIC insurance.
Pros and cons of using reloadable cards
Given that these stored value cards are now gaining in popularity, you may be wondering if you should join the bandwagon. Before you decide, allow us to define the pros and cons of using this purchasing tool.
Advantages
There are the benefits of using prepaid cards as your payment choice.
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You get to control your spending. When using cards, this is the most important of all the benefits. It is practically like cash wherein you cannot spend anymore when the stored value runs out. You have to replenish before you can use it again.
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It is easier to carry. You do not have to carry cash with you and endanger it from attracting thieves. Cash, after all, it more eye catching than just a card – that is actually very easy to carry and hide.
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Your money is safe in your bank account. In case it is stolen, you are only limited to the amount of that card – not your whole savings account.
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Protects your data. Since this is not linked to your bank account, it does not contain any information about you. When you lose it, you only lose the value on the card – nothing else.
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It serves as a great way to teach your kids about money. Since the card can only be used until after the value is spent, you can teach your kid about proper spending habits.
Disadvantages
Here are the disadvantages of using prepaid cards are your primary purchasing tool.
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Too many fees. There are many fees involved like loading, balance inquiries, inactivity, ATM withdrawals, monthly maintenance, etc. The card fees are usually different depending on the issuer.
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There is a hold rule. There are certain purchases or guarantees that will trigger a hold on your funds. For instance, if you use it in gas stations or you use it on hotel rooms, a portion or everything in your fund will be put on hold.
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You cannot build your credit score through this card. You are not using debt so it will definitely be useless on your credit report.
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Limited regulations and protection from the government. Unlike credit cards or debit cards, this does not have much consumer protection with every use. If your card is stolen or something similar, no one will be liable to help recover your losses.
For the last disadvantage, the Consumer Financial Protection Bureau (CFPB) is supposedly, working on it. Back in May 2012, the CFPB sought to impose regulations on prepaid cards to protect its users. Until now, we have yet to find a relevant form of regulation to be imposed in the industry. Based on the new release found on ConsumerFinance.gov, the government agency would like to regulate the following:
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Full disclosure of fees and terms. Since there is no regulation, the issuers of prepaid cards are not as effective as they should be in helping consumers understand the product and the costs involved.
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Unauthorized transactions of the card. When the card is stolen, the liability is usually on the owner of the card alone. This is what the CFPB will hope to solve. In the same way that regulations have limited the liability of consumers for unauthorized debit and credit card use, this is the target for prepaid cards.
There are other plans for prepaid cards but we have yet to see what will happen in the near future. One thing is for certain, the data security, cashless convenience and the ability to help you stay out of debt makes prepaid cards a serious contender in the payment choice category.