Month: October 2009

I wrote about the pros and cons of prepaid cards a few months ago, but at that time I missed out two prominent reasons why people get a prepaid debit card.

My initial feeling was that a large majority of prepaid debit card holders are simply unable to get a credit card or open a regular bank account with a debit card. But apart from that – there are at least two big reasons why people go for a prepaid debit card.

1. Control spending: Many people who have had debt problems in the past choose a prepaid debit card because it keeps a check on their spending. It is far better than using a credit card because there is no control on how far along your debt can go. It is also slightly better than using a debit card, because if you are in the habit of going over limit, then overdraft fees can kill you with a bank debit card.

Prepaid cards don’t allow you to overdraw, so there isn’t much risk of an overdraft fee in most cases. However, prepaid debit cards may charge you a decline fee, which is charged if you try to make a purchase which overdraws your funds. If you shop around though, you can get a card, which has decline fees in the single digits (much lesser than overdraft fees of most big banks).

2. For their Teens: Parents use prepaid debit cards to give their teens the convenience of a plastic card, while retaining some control over their spending. A prepaid debit card is easy to fund, and while it does have fees that you wouldn’t normally pay with a debit card, the up side is that there are limits to what your teens can spend, so spending can be kept under checks. Some prepaid cards come with features that allow you to set daily limits or exclude transactions from certain categories of places. This is a useful feature to have if you are using such a card with your teens.

These are interesting uses, but you should be aware of the flip sides of such a product too. The obvious ones are all the fees and expenses associated with prepaid cards.

Then there is the subtle issue of not attacking the root of the problem. If you are using a prepaid card because it forces you to control your spending, you are not really altering your behavior, which gets you into trouble in the first place. Prepaid cards are a good start to get control over your spending, but ultimately, you should strive to reach a position where you have credit cards without worrying about getting in debt.

Mr Credit Card from www.askmrcreditcard.com is writing a guest post today for us. Today, he is going to write about how easy credit is destroying America. Mr Credit reviews lots of credit cards and there are lots of credit card offers on his site. If you are in the market for a credit card, he has also compiled a list of the best credit card offers and deals.

The after effects of the 2008 financial crisis that originated from the sub prime crisis still lingers on for many folks in the US. Lots of finger pointing and lots of blame to pass around. But at the root of the crisis, one variable stands out – and that is the amount of debt and leverage in our economy. This applies to both the federal government and individuals. At the root of the problem is easy monetary policy and our tax policies towards debt and I’ll go on to explain other factors that made us such a debt dependent country.

Policies that reward debt

In the US, taxation policies are geared towards taking on debt, taxing equity and not taxing consumption. If we think about things logically, one should not be taxing capital but instead be taxing consumption. But here is the US, it is really lopsided. Capital is taxed. So if you have a capital tax gain, you pay a capital gain tax. If you receive dividends, you pay a tax! The interest that you make on your bank’s savings account is taxed! If you own a “C Corporation”, you are taxed twice! First at a corporate level, and then at an individual level! Talk about work incentives!

But the US taxation policy towards debt is totally reversed! You actually get tax deductions for interest payment on debt! On an individual level, your mortgage interest is tax deductible!

The result of these policies is an incentive to take on excessive debt. In the area of economic studies the Miller Modigliani theory states that there is an optimal cost of capital in a tax neutral world. A corporation having 100% equity in their capital structure can lower its cost of capital (up to a point) by taking on some debt. In the world of taxation where equity is taxed and debt interest is given deductions, it skews US corporations to have more debt than necessary.

Generous Tax Policies on Mortgage and Home

In the United States, policies are geared towards encouraging home ownership. Interest payments on mortgage interest is a tax deductible item. There is also no capital gains taxes on the first $500,000 for your primary residence. Most major developed nations have no such policies that reward home owners. Yet, they have similar home ownership as the United States.

Continue reading “How Easy Money and Tax Policies on Debt Are Ruining the US?”