There are some key similarities and important differences to keep in mind when considering whether to use a bank debit card or a prepaid debit card.
Figuring out which of these options works well for you can mean a difference in convenience and fees.
What is a Bank Debit Card?
A debit card is linked to your bank checking account and can be used to withdraw cash from an ATM, purchase groceries, pay bills, make online purchases and much more. When you use your debit card, the money is deducted from your checking account. If you use more money than you have in your checking account, banks may charge you a hefty overdraft fee.
A typical complaint most consumers have with bank debit cards revolves around their overdraft fees. Whether you weren’t totally sure about your checking account balance or if you thought your paycheck was hitting your account sooner then it did, overdraft fees can certainly be a nuisance. The fees can sometimes reach upwards of $35 per instance. If you’re not careful, too many overdrafts can lead to negative consequences for your ChexSystems and/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 such programs. Customers can simply opt out. Not taking advantage of this little-known option costs consumers billions of dollars in overdraft fees each year.
What is a Prepaid Card?
A prepaid card does not require a checking account. You must “load” money onto the card and the amount of money you load is the amount which can be spent to make purchases or withdraw money from an ATM.
You can load the prepaid 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.
Though prepaid debit cards can seem attractive due to their lack of overdraft charges, that doesn’t mean they come without their own potentially costly fees. Two of these fees to take note of are monthly maintenance fees and the fees required to upload funds to your card’s balance.
According to our research, 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 a using a prepaid debit card closer to an expense than an asset. Our research indicates that the rate structure of prepaid debit cards can be like experiencing death from a thousand paper cuts. We suggest loading funds through direct deposit to avoid the more blatant loading fees charged by retailers like Walmart and CVS.
Consumer Protection: Improving, But Not Perfect
One last thing to keep in mind when comparing prepaid debit cards and banking debit cards is the consumer protection features of each option. Banking debit cards are extremely regulated and have countless consumer protections in place to protect their users.
Prepaid debit cards are a much newer phenomena 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 few repercussions.
In either case, we recommend you remain vigilant about your spending and account balances at all times.
Which Card Is Best For Me?
After comparing the pros and cons of each option, the choice seems fairly clear: bank debit cards are still a superior option for most consumers. The ease and convenience of adding money into your checking account without any hidden fees, the consumer protections attached to these cards, and the freedom to spend your money immediately makes 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 a stricter budget and to have another form of cash handy at all times, but their fees can add up and they are still in need of more regulation to protect their users.