We’re living in tight times, but the savvy spender is above all a budgeting baddie: someone who allocates their money, sticks to the plan, and comes out richer at the end.
But if you really want to up your personal finance game, you find what’s easy, and you find what works. Enter the prepaid credit card.
A prepaid credit card acts like your normal credit card, with a few key differences. Instead of borrowing then repaying money from a financial institution or your bank, you load your prepaid credit card with cash first. When you use a prepaid, you’re spending money you’ve already budgeted out instead of borrowing until you can pay it back.
The other key difference is that a prepaid is not connected to any kind of bank account. Most prepaid cards are set up so they can receive funds electronically, just as you would transferring money on your online banking. But they don’t act as a separate account; instead, they’re like a reloadable gift card that’s good almost anywhere.
But what does this mean for you? A unique and versatile way of tracking and saving your money.
Here’s what you should know first
Unlike a debit or credit card, there is no easy way of recovering your prepaid or the money on it if it’s lost or stolen and used. Once it’s gone, it’s gone. And that is going to affect how you use your card.
Of course, the smart user will not keep a massive amount of money on a prepaid credit card. By keeping the balance low, you won’t be hit as hard if your card is ever lost or stolen. And having only a bit of cash on the card after budgeting can work in your favour: if you know you only have a couple hundred versus a couple thousand to spend, you might find yourself a little more careful where you lay your card down.
Another inconvenience might be reloading. Most prepaid credit cards are reloaded only through e-transfer, which means you’ll have to log into your online banking or arrange the transfer at your bank branch to top up your card. Most institutions also charge $1.00-$1.50 per transaction (which comes out of your bank account, not from the amount your moving to the card). This can be inconvenient, especially if you plan on reloading your card weekly.
So Why Use One?
Prepaid credit cards have a unique way of operating that isn’t like a credit or debit card. You could say that they work like a combination of the two, with certain limitations that make them useful for both saving and spending.
Prepaid credit cards are great for allocating cash for a purchase or purpose down the road
You know that space on your living room wall? The one that would like really great with a 75” LED smart TV? Or maybe you’re hankering for a new Apple Watch, a piece of art, professional bass fishing equipment. Take this as your cue to try a prepaid credit card to work up to your purchase.
Prepaids are useful for allocating money for a specific use, and it doesn’t have to get more complicated than that. Decide what you want to use the card for, and reload as you need. When using one for essential savings like an emergency or auto repair fund, for example, it’s a good idea to decide on and reload a specific amount of money per pay cheque. Some prepaid credit card companies even offer a direct deposit option that can help allocate money before you even see it in your bank. This way, you’re always ahead if there are some unexpected expenses.
This method works great because you still have access to your money if you need it, but you’ll think twice before using it for anything other than its purpose.
They’re perfect for limiting purchases in a specific area or for certain types of products or services
Want to reduce the amount of fast food you eat or cut your online spending? Easy. Load your prepaid credit card with the amount you want to allocate, and only use the card only for purchases that fall under the type of spending you’re trying to limit. Once the card is tapped out, so is your spending.
A small warning: If you’re caught without cash and you’re craving McDonald’s, it is going to be tempting—sometimes irresistible—to use other sources of money, i.e., your debit and regular credit cards right in your wallet. Finding yourself unable to purchase something you really want while knowing that there’s a perfectly good Mastercard in your pocket—or even another prepaid—can throw a wrench in your budgeting plans. Even using a different card ‘just this once’ can make it difficult to accurately and honestly track your spending: you might get busy and forget to record it, and you might find it easier to do it again.
The best way around this is to know yourself. If you don’t think that you can resist the temptation, then don’t do it. Your prepaid credit card can be very helpful in limiting spending but it will only work if you’re able to stick with your rules about how to use it.
They can offer a bird’s eye view of your spending habits.
Most prepaid credit card companies have an app that can connect you with your cash with just a few taps on your phone. While this is great for checking your balance, the real power is the insight your app can give you into your spending.
Tracking how much of and where your money is going is a game-changer when it comes to budgeting because it shows you where you need to cut. Prepaid credit cards and their apps can make it very easy to see the frequency and dollar amount of your cash flow out: there is a big difference between thinking that you shop online too much and actually seeing the amount you habitually drop at Wayfair and Amazon.
They have some great perks
Some prepaid credit cards offer some very useful features for both saving, spending, and security.
Koho Visa Prepaid has several in-app offers including RoundUps, which bumps up every purchase to the nearest dollar amount of your choice and saves the difference so you can cash it out at a later time.
BMO’s Prepaid MasterCard gives you zero liability if your card is used without your authorization, so long as it is reported within 24 hours of the use, and Mogo Prepaid Visa offers 2% unlimited bitcoin cashback and carbon offsetting.
Each card is going to come with a few helpful features to stay ahead of their competition. Do your research and pick the best one for your lifestyle.
Conclusion
In the end, a prepaid credit card is just another way to budget. But because of its limitations, how it works, and even the perks, they can be a powerful tool in your budgeting strategy.
How do you use your prepaid credit card?