Why are Millennials Using Prepaid Credit Cards?

Headlines about millennials killing various products and industries are so common these days that there are entire Twitter threads devoted to poking fun at them. We millennials (yes, I am one of them) have somehow managed to kill everything from fashion to the 9-to-5 workday to bar soap. And now we have a new murder to add to our rap sheet: credit cards.

A recent report from the Philadelphia Fed shows millennials ditching credit cards en masse in favor of prepaid cards. Prepaid cards, which used to mainly be used by low-income and unbanked people, are a darling of budget-conscious millennials. The report showed that even millennials with household incomes of $100,000+ reported using prepaid cards in huge percentages.

So why are we using these cards--which come with some serious disadvantages? And if you’re a millennial who uses prepaid cards, what might you try instead? Let’s dig into the data.

The Why Behind Prepaid Cards

You might think that millennials are using prepaid cards because they don’t trust big banks. But, actually, we’re more likely to trust banking institutions than our parents. So why are we flocking to prepaid cards? Of course, the reasons will vary depending on the individual. But here are a few reasons for choosing prepaid cards:

A Budgeting Tool

Despite rumors to the contrary, millennials haven’t killed the budget yet. In fact, we’re pretty good budgeters. We spend our money a lot differently than previous generations because we value different things. But we do tend to plan how we spend our money. A Bank of America survey showed that 73% of millennials have a budget and stick to it most months.

One way many millennials budget is by physically (well, electronically) separating their money into budget categories. We may not opt for a Dave Ramsey-style cash budget. (Honestly, the only cash in my car or wallet at the moment is the quarter I save for the shopping cart at Aldi.) But we may separate money into different accounts--or onto different prepaid cards--for spending.

For instance, if I move my fun money to a prepaid card each month, it’s hard to overspend. Once the money runs out, it’s gone. Prepaid cards can help keep me more accountable to my budget.

Related: Free Prepaid Credit Cards

Low Risk

Millennials are pretty risk-averse when it comes to our money. And we’ve seen firsthand what happens when people’s spending gets out of control because of high credit limits. Boomers have more credit cards than millennials and charge a lot more on them. Often because of high student loan payments, millennials know they can’t afford to make payments on a credit card. So rather than risking running up a balance they can’t pay off, they just avoid them altogether.

Prepaid cards, by their very nature, require you to have the money upfront. So they keep spending in check and give you the convenience of swiping plastic without the risk of overspending.

Unable to Get a Credit Card

Some millennials turn to prepaid cards because they actually don’t qualify for a real credit card. This may be because they don’t have much credit history, or they generally don’t borrow much. It may also be because millennials are still struggling to find stable employment, in some cases. Without a solid income to report, credit card companies are less likely to extend credit.

Why Not Prepaid Cards?

Honestly, millennial reasons for turning to prepaid cards seem strong. They want to stick to their budgets and not risk overspending. That’s a good thing, right?

Right. Except that prepaid cards come with issues that many may not consider when deciding to use them. So why should you consider avoiding prepaid cards, even when you think they’re a good tool? Here are the four main reasons:

They’re Expensive

Prepaid cards come with loads of fees, especially compared with credit cards or debit cards. You don’t have to pay interest, of course. But you’re paying money to access your money. For instance, you might pay a fee every time you spend something on the card. Or you might pay money whenever you load the card or get cash back off of it from an ATM. These fees may seem small, but over time, they really do add up.

They Don’t Have the Same Protections

You’ll get some basic fraud protection with a prepaid card. But you don’t get the same protections you get with a credit card or a bank account. The fraud coverage isn’t as robust, for instance. And not all prepaid cards are FDIC-insured like your checking account should be. Consumer protection advocates are trying to get the same protections for prepaid card users that bank accounts have, but this isn’t the same case.

Their Terms Can be Confusing

This is, of course, not unique to prepaid cards. Bank accounts and credit cards can also have confusing terms. But prepaid cards are less regulated, so their terms can be even more confusing. Plus, if you’re buying a prepaid card in a store, you may not have access to all of its terms and conditions on the outside of the package. Most of the fine print lives inside the package, and you can’t see it until you’ve paid for the card.

No Rewards for Spending

Finally, prepaid cards don’t typically offer rewards for spending as credit cards do. Using credit cards wisely can be a great financial move that gives you access to a variety of rewards--travel points, cash back, and more. Plus, credit cards offer a variety of other benefits, including things like additional travel insurance and other features.

What’s the Solution?

So if you’re a millennial currently using a prepaid card or two, what should you do instead? Here are some solutions to consider:

Open a Bank Account

First, if you’re using a prepaid card because you don’t have a bank account at all, get one, and stat! Having a checking and savings account is an essential part of growing up financially. Plus, these accounts will be FDIC-insured. This means that if the bank behind your account tanks, you’ll still get your money back. This may not be the case if you’ve got a large balance on a prepaid card account.

Bottom line: check out our list of the best bank accounts available today, and go open one as soon as you can.

Try Multiple Free Checking Accounts

Are you using prepaid cards to segment your money for budgeting purposes? That’s not a bad strategy. Actually, it’s one that my family uses. But we do it with a few different free checking and savings accounts. Many banks will let you open multiple linked accounts. This makes it easy to move money into an account for a dedicated purpose, like vacations or everyday spending.

Just be sure you check the terms of your bank account. If you have to pay fees when you don’t carry a high balance, you could wind up paying a hefty monthly fee for multiple accounts.

Another option is to consider an account with in-account budgeting tools. With some banks, like PNC, for instance, you can segment your money within the account. That way you can get a feel for where you are with your budget without having to carry multiple cards in your wallet.

Use Credit Wisely and Well

Finally, you need to get hold of the idea that not all credit is bad credit. In fact, regularly using credit cards well can set you up for other borrowing situations, like getting a car loan or a mortgage. If these things are in your future, you should have and use at least one credit card. Even if you’re already a homeowner, using a credit card for everyday spending can get you great rewards over time.

The key is to keep track of your spending. You can use a budgeting tool to track your spending on your debit and credit cards. Then be sure you pay off your credit card ahead of time every month. With this strategy, you’ll get credit card rewards and protections, stick to your budget, and build your credit score over time.