Why are pre-paid credit cards the first choice of Smart Credit Card Users?
Because they change your Credit Card to a functional Debit Card with all the advantages of both types of card. A pre-paid credit card allows you to get the protections of a credit card, to get the financial smarts of a debit card, but avoid the disadvantages of each one.
Background
Many people who are trying to get ahead financially cut up their credit cards and pay only cash for things. It eliminates paying compound interest on your credit card charges, and helps you live within a budget and at or below your means. A big step in getting ahead financially.
If you don’t have a lot of self discipline then this is one way to start walking the path of financial responsibility. But many don’t like carrying cash because they are afraid of being robbed or spending it all at once or loaning it to friends who see that you have a lot of cash.
One alternative way of paying as you go is to use a debit card. A Debit card only draws on your cash balance in your bank account. So your not charging on your credit card and you have the convenience of swiping a card for all your purchases.
But there are risks of Debit cards because your paying with cash. Once you pay with cash you lose all the consumer protections on purchases that make credit cards so attractive, and make them such a dominant part of the personal finance landscape.
Credit Cards Good points
Purchase Disputes: you can dispute purchases you made for things which were broken, misrepresented, or otherwise unsatisfactory.
Debit cards don’t have this feature.
Purchase cancellations
Many credit cards have a window of time to simply cancel a purchase. It can be 24 hours. It can be messy. But usually you have a number to call, an email address or some contact information you need to have the discipline to write down when you buy. And they will simply reacted it your account. Your card issuer will go to bat for you if this doesn’t happen. You just have to provide evidence.
Debit cards don’t have this.
Protection from theft in the form of maximum loss.
If someone steals your credit card and charges $2500 dollars worth of merchandise you are normally only required to pay a maximum of $50.00 of those charges, as long as you notify the credit card issuer with 24-48 hours of the loss. This is huge! Debit Cards don’t have this.
Credit Cards Bad points
Interest, Compound Interest
This is a big one, you pay interest on the purchase price of an item, and you pay interest in the interest, and the compounding occurs daily.
Huge draw back as it can double, triple or 5x the cost of a purchase if you only make the minimal payments. Credit cards are huge profit centers for banks.
Fees
Annual Card Fees; the fee a bank you charges you, so you can pay them interest on your charges. Yes you pay fir the right to pay them interest.
Hello free money…for banks. Yes banks divide their income into service and non-service related. And Yes non-service related items are categorized as such because they are a fee they charge you for something no bank employee provided to you. It was automated work that was free to the bank to provide to you. They charge you anyway and because it costs the bank nothing to provide this non-service so it’s 100% profit. Who can resist 100% profit services? Certainly not your bank. :(
Purchases are easy and lure people into over spending
Credit cards are wonderful financial tools -
They are safer then carrying cash because if your robbed all your cash is gone.
They keep track of all your expenses so you don’t have to and make budgeting and tracking expenses easy.
Big problem with credit cards
But people tend to use them to make more disposable income purchases then they have disposable income. Here disposable income is Defined as the sum of your income minus your recurring bills.
And because most don’t pay off their credit card balance every month their credit cards become a recurring bill, which shrinks their amount of disposable income further each month. This reduces further your ability to pay off your credit card purchases each month, which then raises your recurring monthly bills amount every month. And this the start of the cycle where you get deeper and deeper in credit card debt every month because your disposable income spending is larger then your disposable income. :(
Solutions
Pre-paid Credit Card
The way a pre-paid credit card works is that you pay or deposit your monthly disposable income minus a little cash to carry in your pocket for non- credit card purchases into the card. The you use your credit card like a both a credit card and a debit card. It has the built in protection of over spending, plus the consumer protections of a credit card. But it won’t let you charge anymore then your total monthly disposable income.
Because when you reach your monthly limit by using all the deposited funds you can’t charge anymore.
Now your completely out of the consumer credit card debt cycle.
No compound interest charged in charges.
No large month balances you can’t afford to pay.
Now your living within your means.
Pre-paid cards are only for people who…
Live at or below their means Pay all their credit cards balances monthly
Show they spend responsibly
Pay all their debts on time
Practice fiscal restraint & responsibility
Use technology to automate all these things
So they have more time to spend with their friends, family and themselves…
It sounds like a WIN!
What do do you think?
