This is a guest post by David Silverstone who writes about personal finance, credit cards, and debit cards on the website, Credit Card Insider, which is a credit resource, providing plain-language guidance from industry leaders.
Credit card debt is huge in the U.S. Last year, the average American household’s credit card debt was equal to $15,799. American consumers know that they need to eliminate this debt, but they also know that they will have large purchases to make in the future. These larger purchases may be necessities, such as refrigerators, new cars and houses, but it can also be a pleasurable expense, such as a fabulous dream vacation. The new trend is to save for these purchases so that consumers do not have to use their credit cards, and some people are choosing to embark on this adventure by engaging in reverse budgeting.
What Is Reverse Budgeting?
Reverse budgeting is way in which people save for their purchases without having to resort to burdening themselves with more debt. First, consumers decide how they would like to use the money they are going to save. Then, they will calculate how much money they will need to pay for their dreams. The next step is to determine how much money they can set aside per month to save for their goals.
Reverse budgeting has been growing in popularity, and the reason may be because so many Americans already owe so much money to their creditors. One way that people have begun to save for future purchases is to obtain prepaid debit cards.
How Do Prepaid Debit Cards Work?
Prepaid debit cards are an extremely convenient way to make purchases, and they prevent people from spending more money than they have. Furthermore, it’s really easy for consumers to add funds to their prepaid debit cards every month. After they have succeeded in saving the amount of money they needed for their goals, they can use their cards to pay for the item online or inside the store. They can also use them to pay several different bills online.
Advantages of Prepaid Debit Cards
Prepaid debit cards do have their advantages and disadvantages. Consumers like credit cards because they eliminate the need to carry a large sum of cash. Those who would like to keep from adding to their credit card debts cannot resort to using credit cards, but if they have a prepaid debit card, they can travel all over the country or even outside of U.S. borders and have a safe method of payment that is widely accepted.
The amount of money that is on the prepaid card is all that consumers can spend. If they were to try to purchase something outside of their budgets, the card would be denied.
Disadvantages of Prepaid Debit Cards
Undoubtedly, people who are carrying too much credit card debt are paying with lower credit scores. Debit card issuers are not extending credit to holders of prepaid debit cards because these consumers add money to their cards’ balances. Therefore, debit card issuers do not report to the major credit bureaus that their clients are paying their bills on time every month because there aren’t any bills to be paid. In this manner, consumers lose the opportunity to help increase their credit scores because they are paying with a prepaid debit card.
Even the best prepaid debit cards also carry fees. Depending on the card, people may be required to pay several different fees for many purposes. For example, if people need cash for any reason and they obtain it from an ATM, they may be charged $2 for every such transaction. Consumers may also need to pay a fee to activate the card, another fee to reload the card and yet another fee to maintain the account.
Reverse budgeting can help people keep their minds on saving rather than spending, and prepaid debit cards may be an appropriate way to keep their savings safe. If they ensure that they are paying the least amount in fees, this method may greatly benefit Americans with large credit card debts.
This is a guest post by David Silverstone who writes about personal finance, credit cards, and debit cards on the website, Credit Card Insider. If you would like to write an article for Money Q&A, please visit our Guest Posting Guidelines page.