December 4, 2008

BIRMINGHAM, Ala. - National debit card purchases are forecasted to climb by 13 percent for the year by the end of 2008 compared to just 3 percent growth in credit card purchases, according to The Nilson Report, an industry newsletter. The numbers indicate a strong shift away from credit as the U.S. economy struggles through recession. UAB assistant professor of Finance Stephanie Rauterkus, Ph.D., said three more fiscally responsible alternatives are leading the move away from traditional credit cards and their high interest payments and spending allowances.

1. Pre-paid credit or debit cards

Prepaid card accounts allow for better budgetary control. A card holder deposits a set amount of money into the card's account and has access only to those funds. The prepaid cards are not linked to a consumer's traditional bank account, which offers protection from the misuse of bank funds. Still, users are required to pay off their monthly charges or face interest payments and high penalty fees. Fees can also be assessed with some plans if a card is not used on regular intervals.

"Prepaid cards offer consumers with poor credit histories the chance to rebuild their credit." Rauterkus said. "Prepaid cards don't offer the seemingly endless spending limits that many traditional credit cards do so a consumer is less likely build up debt."

2. Debit cards

Typically tied to a user's bank checking or savings account, debit cards allow for purchases only as bank account funds are available. While they help limit spending, undisciplined use of debit cards comes with consequences, including high fees if spending exceeds the amount available in a user's card-linked bank account.

"Debit transactions are withdrawn immediately from a consumer's bank account so there are no surprise charges like there can be when a credit card bill arrives at the end of the month," Rauterkus said. "Still if consumers don't keep track of their debit purchases they risk over-drawing on their bank accounts, which can lead to costly fees from the bank"

3. Cash

Considered by financial experts to be king in times of financial and economic instability, cash protects consumers from interest payments, penalty fees and other costs associated with traditional and prepaid credit cards and debit cards. Using cash keeps consumers out of debt and always within budget.

"Many people can benefit from the envelope method of budgeting where you set aside cash for each of your monthly purchases or needs and put the cash in separate envelopes," Rauterkus said.  "When the cash envelope for Christmas gifts is empty then you're done shopping for the season, and when the envelope with cash for movie tickets and restaurant dinners is empty you hold off on entertainment until the next payday."