Prepaid Debit Cards - An Alternative to a Checking Account?

To save money on bank overdraft fees and avoid overspending, many people have switched to the increasingly popular prepaid debit card. This allows the owner to put money on the card and spend it just like cash. It seems both cheaper and more convenient, but are prepaid debit cards a better option for you than a bank account?

Fees

Although bank accounts seem to come with a lot of fees, prepaid debit cards seem to come with just as many and more. Just like a debit card that is attached to a checking account, a prepaid debit card will require you to pay a fee for ATM withdraws, stop payments, currency conversions, and for a new card if the old one is lost or broken. Like most checking accounts, there is probably a minimum balance as well.

But there are additional fees as well. There may be a fee for putting money onto the card, for using your PIN number instead of signing for a purchase, or for not using the card for a month. Perhaps most inconvenient of all is a charge to make a customer service call. Most cards will only let you call the card provider once a month for free, even if additional calls are made because of the card company's error or theft.

The amount that you spend on a checking account in fees varies from bank to bank, but most prepaid debit cards will cost between $30 and $60 per month based on "normal" spending patterns. If you are spending less than $30 a month on overdraft, maintenance, and service fees for your checking account, a prepaid debit card would probably cost as much as or more than a regular checking account in fees.

Lifestyle Limitations

Regular checking accounts have a few limitations. Depending on the bank, there are probably some posting periods that don't allow you to instantly get to a check when you cash it. You probably have a minimum balance requirement. But really, there are not many limitations on what you can do with your money.

With prepaid debit cards, there are limits on how much you can spend in one day, how many transactions you're allowed per day, how much you can spend per transaction, and how much you're allowed to load on the card at once. Although the limits offered in the card holder agreement may seem generous, they are easy to overstep for special events such as Christmas or back to school shopping. And of course, a prepaid debit card is not designed to handle larger items such as a directly deposited paycheck or a mortgage payment.

Also important is that many prepaid debit cards are not linked to any financial institution. In other words, they cannot offer you FDIC insurance for your deposit. If the company offering you the card goes out of business, there's nothing guaranteeing you your money.

Long-term Inconveniences

There are some things to look for when shopping for prepaid debit cards that you might not think of right away. It really depends on your needs, but there are many inconveniences listed in the fine print of a prepaid cardholder agreement that can become large hassles in the long run.

Many prepaid cards don't offer you bill pay, while nearly every major checking account provider in America offers this service. Many card providers reserve the right to cancel your card at any time should you try to spend more than is on it. In comparison, a bank will probably not close down your checking account for the same reason.

Some cards require you to always go inside a gas station to pay for gas. But more importantly, these cards tend to offer you the services that you may really need as "add ons" for additional fees, such as the ability to write someone a check.

Conclusion

For those who value having spending limitations at $30 per month or more, prepaid debit cards can be a useful way to control spending. However, prepaid debit cards should be used for petty spending only since they have too many limitations to be used for every financial aspect of life. They cannot and should not replace a traditional bank account, no matter what the fees. And unless you are paying a large amount in bank fees each month, a prepaid debit card is probably more expensive than a checking account anyways.