by Joseph Kenny | 11/11/09

There’s no doubt about it: the economy isn’t what it used to be. However, there’s always a silver lining, and for American consumers, the economic downturn could be seen as positive when it comes to improved spending habits.

The negative conditions have reminded people that they cannot continue to spend more than they have available, and nowhere is this mindset more evident than in the sharp increase in prepaid cards. The numbers don’t lie: in 2008, consumers loaded $8.7 billion on their prepaid cards, while the year prior, they loaded only $4 billion.

So, what are prepaid credit cards, and why are they becoming so popular? Well, prepaid cards are a different kind of plastic card. With a traditional credit card, you pay at the end of the month for the purchases you charged, and your only disincentives are a possible credit limit and the sneaking suspicion that you won’t be able to afford all those shoes you just bought on impulse.

If you opt for a prepaid card, on the other hand, you set aside a certain amount of money to be loaded onto the card, much like a gift card that can be used everywhere.

There are a number of different reasons why people are opting for a prepaid card as opposed to a credit card. The biggest reason is that it’s no longer possible for people to charge more than they will be able to afford, as they can only spend what’s available on their card at the time. This means they won’t have to deal with interest rates, balance transfers, and other pesky issues that plague regular credit cards.

Also, for many people, these prepaid cards can function as their bank account. They can direct deposit their paychecks into the prepaid card instead of into cash or a bank account, making it a convenient, easy-to-manage place for to manage their money. For younger individuals, prepaid cards are often seen as a good stepping stone for eventually having their own credit card, because it doesn’t allow them to charge more than they have on the card.

This won’t be the only reason why youth are choosing prepaid cards over credit cards in the near future. There is a new credit card reform law in the works that seeks to require an adult to co-sign for anyone under 21 before the youth can have a credit card. With greater government oversight in the areas of banking and finance, now is an excellent time to develop responsible fiscal habits.

However, there are some notable downsides to prepaid cards. For one thing, if you want to pay a bill for something that you’ll have the money for by next paycheck, but that paycheck is still several days away, you won’t have the convenience of a credit card to delay your payment to the end of the month. It might also make tracking your purchases a bigger challenge, since you won’t have a clear list at the end of each month.

The other big downside to prepaid cards is the fees. Most have an activation fee. Some have monthly fees for using the card, and inactivity fees if you don’t use it often enough. Some charge a fee if you don’t keep a certain balance on the card, and others charge a fee for checking your balance at the ATM. Some even charge for customer service calls. Unfortunately, this reliance on fees isn’t likely to change anytime soon, because the credit card companies aren’t making money off of you by charging interest on any prepaid cards, like they do with credit cards.