This a guest post from Tim Chen is CEO of NerdWallet. NerdWallet helps you find the best credit card, by sorting nearly 600 credit cards by best rewards and lowest APRs.
Prepaid debit cards and checking accounts both have sneaky hidden fees. If your goal is to choose the option with less fees, you’re usually better off going with the checking account. We’ll explain why below.
Which has lower fees?
It depends how often you overdraft
Based on normal use, prepaid debit cards are more expensive than checking accounts; even online checking accounts. We conducted a hypothetical test, where we compare checking account fees at the 10 largest checking account providers, versus prepaid debit card fees for 10 popular prepay cards, including the most popular one in America, the Target RedCard.
The average prepaid debit card costs $19.14 per month, and the average checking account costs $6.82 per month. We explain how we calculated these numbers in the appendix.
The big swing factor comes into play when you opt into overdraft protection, which is the way banks make money on checking accounts. Overdrafts on a debit card linked to a checking account are often accidental. These fees typically range from $28 to $36 per incident, so they can quickly add up to hundreds of dollars. This is especially true if you are not aware that your account is empty!
Just how much money might you run up in overdraft fees?
According to an FDIC study, the 4.9% of Americans who overdrew 20 or more times per year footed an average bill of $1,610.
How many times per year would you have to overdraft in order for your checking account to become more expensive than a prepaid debit card? 5.
The average overdraft fee at the 10 largest checking account providers in America is $33.75, and your average prepaid debit card racks up $229.67 per year in fees compared with $81.80 at your bank. If you have the discipline to avoid account overdrafts, you’re much better off going with a bank.
As of August 2010, the FDIC has banned the practice of banks signing you up for overdraft protection without your consent. So even better than being disciplined – just never don’t opt in!
We recommend you get a checking account and secured credit card instead of a prepaid debit card
Your financial future may be better off without a prepaid debit card. We think you should consider getting a secured credit card, combined with a checking account instead.
- A prepaid debit card does nothing to build your credit, whereas a secured credit card gets you on the right track.
- Both types require you to pay money upfront in order to use the card, so why not build credit while you’re doing so?
- There are numerous complaints on internet message boards about people getting screwed over by merchant disputes and fraud scams when using a prepaid debit card. They simply do not offer the same level of merchant dispute protection, fraud protection, customer service, and travel protection benefits offered by most credit cards.
- Many secured cards offered by large banks offer a chance to switch from a secured card to an unsecured card after a period of good behavior. So eventually you could enjoy the benefits of a cashback card or a 0% APR balance transfer card.
In conclusion, we think prepaid debit cards are typically worse than checking accounts, whether you are doing it for the short run or the long run. The number one reason cited in an FDIC survey for not opening a checking account is “not enough money to need one” – well, given how much cheaper they are than using cash checking services and prepaid debit cards, you don’t have enough money NOT to have one.
For prepaid debit cards, we assumed your monthly usage would include 1.5 ATM withdrawals, 8 purchases, 2 reloads, and 1 balance inquiry. We compared cards from Green Dot, Walmart MoneyCard, NetSpend Visa, Emerald Card, Rush Card, Vision Premier, Western Union MoneyWise, AccountNow, ACE Cash Express (NetSpend), and PayPower.
For banks, we assumed your initial checking account would start with $100, and that you would use an out of network ATM once a month. We compared checking accounts from Bank of America, Capital One, Chase, Citi, HSBC, PNC, SunTrust, TD Bank, US Bank, and Wells Fargo.
Tim Chen is CEO of NerdWallet. NerdWallet helps you find the best credit card, by sorting nearly 600 credit cards by best rewards and lowest APRs. Tim writes about credit cards for the Forbes Moneybuilder Blog, Huffington Post, and the Christian Science Monitor.