Debit cards are one of the most popular payment options, and it’s easy to see why. You don’t have to carry cash or checks with you, they’re typically easier to get than credit cards, and they don’t come with some of the risks of debt and a lowered credit score that credit cards do. But not all debit cards are the same.
There are two main types of debit cards – bank debit cards and prepaid debit cards. While both options have some key similarities, they also have some important differences, including costs, convenience, and options for accessing funds.
If you’re trying to choose whether a bank debit card or a prepaid debit card is right for you, here’s what to keep in mind.
What is a Bank Debit Card?
Before we compare the two types of debit cards, let’s first talk about what each one is. We’ll begin with a bank debit card.
A bank debit card is what most likely comes to mind when you hear the term debit card. A bank debit card is linked to your bank checking account, and you therefore must have a checking account to have a bank debit card.
With a bank debit card, you can withdraw cash from an ATM. You can also use a bank debit card like cash or checks to make in-person purchases, for example, to pay for groceries at the grocery store. Furthermore, like a credit card, you can use a debit card to make online purchases, pay bills online, etc.
How a Bank Debt Card Works vs. Cash & Credit Cards
While a debit card allows you to make purchases like cash or a credit card, the way the payment is processed is different.
With cash, a transaction is as simple as the exchange of the agreed-upon sum of money. When it comes to how credit cards work, essentially, the credit card company loans you the money for the transaction. The person or company at the other end of the transaction receives the funds, and the credit card company sends you a bill (your credit card statement) with all the money they’ve loaned you.
You then pay your credit card bill, which is you paying back the credit card company the money it loaned you. If you do not pay your credit card bill in full, you pay credit card interest. You can think of interest as the main way credit card companies make a profit from loaning people money.
A debit card transaction is different from both cash and credit cards in terms of how it’s processed. When you use your bank debit card, the money is deducted from your checking account.
This provides you with the ease of a credit card, but since you are using money already in your account, you’re not borrowing money from a credit card company and therefore will not be charged interest. In this way, a bank debit card is most like a check in the sense that there is no cash exchanged, but the money is still debited directly from your checking account.
While you may not have to worry about racking up a large credit card bill, debit cards may come with hefty fees, which we’ll look at later in this post.
What is a Prepaid Debit Card?
Next, we’ll look at prepaid debit cards.
The biggest difference between a prepaid debit card and a bank debit card is that a prepaid debit card does not require a checking account. With a significant number of unbanked or underbanked households in the U.S., there are ways to live without a bank account that are important to know about.
How a Prepaid Debit Card Works
With prepaid debit cards, you must “load” money onto the card and the amount of money you load is the amount you can spend.
Like a bank debit card, a prepaid debit card allows you to withdraw cash from an ATM, make in-person purchases, pay bills, and make online purchases, but unlike a bank debit card, it does not allow you to spend more than you have.
This means that, like cash, if you don’t have the amount necessary to cover the purchase, you typically can’t complete the transaction, but it also means no overdraft fees.
Though prepaid debit cards can seem attractive due to their lack of overdraft fees, that doesn’t mean they come without their own potentially costly fees, which we’ll look at in the upcoming costs and fees section.
Bank Debit Card vs Prepaid Debit Card
Now that we understand the basics of each type of debit card, we’ll compare them in a few key areas, specifically – costs and fees, accessing funds, and consumer protection and FDIC Insurance.
In theory, not spending more than you have in your account may sound simple enough but in reality, it’s often incredibly easy to overdraft your account. Perhaps you didn’t know the exact balance of your account, knew the balance but weren’t aware of a pending transaction that lowered your balance, or you thought your paycheck would arrive in your account sooner than it did. In short, overdraft fees can be a nuisance for even the most conscientious debit card user.
How bad are overdraft fees exactly? The fees vary depending on the issuing bank and the specific card, but can sometimes reach upwards of $35, per instance. A further concern is that too many overdrafts may lead to negative consequences for your ChexSystems or credit score.
Fortunately, there’s an easy way to avoid overdraft charges on a traditional checking account. Federal Reserve rules require banks to seek customers’ approval before enrolling them in overdraft programs. This means you have the ability to simply opt-out. Taking advantage of this little-known option would save consumers billions of dollars in overdraft fees each year.
Since prepaid debit cards are not linked to a checking account, overdrafting money from your account is not an option, and there are therefore no overdraft fees, but that doesn’t mean prepaid debit cards don’t come with potential fees of their own. Two of these fees to take note of are monthly maintenance fees and the fees required to upload funds to your card’s balance.
Prepaid debit cards can come with a monthly maintenance fee that can average $9.28. Similarly, for each time you upload money onto the card, you could be charged a fee of up to $4.95.
These fees can add up quickly and may make using a prepaid debit card closer to an expense than an asset. One way to limit the impact of these fees is to load funds through direct deposit to avoid the often higher loading fees charged by retailers like Walmart and CVS.
- ATM
All bank debit cards allow you to withdraw cash at an ATM, and most, though not all, prepaid cards do, as well. The difference is often in the fees you pay, which vary depending on the bank, the ATM, and the card. If you plan to withdraw money from an ATM regularly, no matter which type of debit card you choose, you should compare options from different banks and cards to find one with lower withdrawal fees. - Check-Writing
Since a bank debit card is linked to a checking account, when you have a bank debit card you also have the ability to write checks. This is one of many reasons to have a checking account. You could use this option to make large payments, such as your rent, or to make payments through the mail, such as certain bills. A prepaid debit card does not have a checking account associated with it and therefore does not come with check-writing abilities. - Reloading Funds
With a bank debit card, reloading funds is as simple as making a deposit. You can do this by having money deposited into the account (such as with a paycheck), depositing a check, going to the bank and depositing cash, or if you have multiple accounts, you can transfer money from one account to another. With a prepaid debit card, you can load funds to the card in a number of ways including direct deposit, adding funds at certain retailers or financial institutions, or transferring funds from an existing bank account. But as mentioned previously, there may be costly fees associated with adding funds to your prepaid debit card.
Bank debit cards are extremely regulated and have countless consumer protections in place to protect their users. Prepaid debit cards are a much newer phenomenon though, and lawmakers have still not properly addressed all the security issues surrounding these cards. Fraud prevention is the biggest worry because some criminals can steal a cardholder’s information or funds from prepaid debit cards with fewer repercussions.
One protection all bank debit cards have that not all prepaid debit cards have is FDIC insurance. If a bank were to close, FDIC insurance ensures that the money you have in a checking or savings account at that bank, up to $250,000, is safe.
Which Card Is Best For Me?
As with most personal finance decisions, there is no one option that’s best for everyone. That being said, for most consumers; bank debit cards are the better option.
The ease and convenience of adding money to your checking account without any hidden fees, the guaranteed consumer protections attached to these cards, and the freedom to spend your money immediately make them a great option for anyone looking to maintain a healthy financial lifestyle.
Prepaid debit cards are great for those who are looking to start or stick to a stricter budget or who do not have access to a checking account. But consumers should use these cards with care since fees can add up quickly and they are still in need of more regulation to protect their users.
Takeaway
Debit cards are a convenient way to make purchases, but whether you choose a bank debit card or prepaid debit card, it’s important to remain vigilant and make sure convenience doesn’t cause you to make decisions that are more costly in the long run.
