Is a Prepaid Debit Card Really Cheaper and Better than a Bank Debit Card?

By Xin Lu. Last updated 9 October 2009. 20 comments
Photo: Debit Card

A few month ago, my husband received an unsolicited Visa Debit Card from NetSpend and I wrote about it here on Wise Bread. I admit that I did not know much about NetSpend at that time besides that they were sending out unsolicited cards. According to the comments many people received these unwelcomed cards, and some were even sent to to their pets, underaged kids, and ex-husband. What I found interesting was that several commenters defended prepaid debit cards like NetSpend and stated that it was cheaper than getting a bank account. In response to these comments, I decided to look into the fees and services of prepaid debit cards.

First of all, I looked at the NetSpend fee schedule. There seems to be two types of customers: Pay-As-You-Go and Fee Advantage customers. The Pay-As-You-Go customers have to pay $2.00 for each PIN purchase, and $1.00 for each signature purchase. The Fee Advantage customers have to pay $9.95 as a monthly service fee and both types of customers need to pay $9.95 to get a card. There is also a charge for loading money onto the card determined by the local distributors, and non-internet account balance inquiries cost 50 cents each. Each ATM withdrawal costs $2.50, and each ATM decline costs $1.00. Additionally, if there were no transactions within 90 days then there is an additional $5.95 per month account maintenance fee. Additionally, if you try to close your account you will be charged a fee of $5.95. Similar services like Green Dot also has a full menu of fees. In the case of Green Dot the company continues to assess a monthly charge even after the balance falls below $0.

What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

So how does this compare to a bank account? It is true that there are no overdraft fees on these cards, but as long as you watch your balance carefully you can avoid overdrafts fees on a bank account. Many banks also offer free checking accounts with minimum balance requirements of under $100 with no account maintenance fees. The checking accounts usually come with a debit card that can be used at the bank's ATMs and many stores without a fee for every single swipe. Also, debit cards associated with checking and savings accounts have much better fraud protection than prepaid debit cards. Usually credit cards and debit cards associated with deposit accounts limit your liability in case of fraud and the money you deposit in any FDIC member bank would be insured. However, prepaid debit cards do not seem to have that protection so you may be on the hook for any fraudulent activity. Finally, I think it is ridiculous that many of these prepaid cards charge people for loading money onto the card. I have never had a bank account that charged me for depositing money.

I think the main issue with these prepaid cards right now is that they are much less regulated than bank accounts and credit cards. This lack of regulation allows them to send out unsolicited cards, and also nickel and dime those who are unable to get a regular bank account or credit card. The potential for fraud is also very high since anyone can get one of these cards very easily due to the way they are being distributed. I understand that these cards may be the only choice for those out there who cannot get a regular bank account or credit card, but it really seems that the industry is taking advantage of those who need every bit of their cash by assessing all of these fees. If you do have one of these prepaid cards that charges for every little thing you do, make sure that you avoid as many fees as you can by minimizing the number of transactions you make and also meet any deposit requirements. It is also possible to shop around for the company that has the least fees.

For further reading about a variety of prepaid card fees and problems the New York Times just published this a great article titled Prepaid, but Not Prepared for Debit Card Fees. Do you have one of these cards? How do you minimize the fees? Do you believe that they are better than bank accounts?

 

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

4.2
Average: 4.2 (5 votes)
Your rating: None
ShareThis

comments

20 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Richard

If you don't have the $100 to keep a no-frills free-checking account with a debit card, just use cash. Why tie up your money and then have to pay fees to use your own money?

Guest's picture

Wow, those fees are awful.

I don't have a checking account. After getting myself in the hole a couple times, I just stopped using one.

My employer provides a prepaid debit card for direct deposit. Except for ATM fees, which can be avoided by getting cash back on debit transactions, the only fee is a $2.00 a month batch fee. I avoid overdraft because they simply decline anything over the limit when many banks won't. My income is small enough that the margin for error doesn't exist. One overdraft episode and I'd be behind on bills. I work to hard to deal with those things.

I would highly recommend a card like I have, from an employer, for anyone who lives on a small income with no buffer zone. I've disputed charges on several occasions with timely response. It has worked for me for three years. No overdraft has helped me learn to manage my money better with no fear of screwing up.

Guest's picture
Linda Jackson

Netspend has been around for years and if you haven't taken advantage of it, you must have money to burn! NetSpend is the way to go!

Guest's picture
nikki p

I feel much more safer with a regular debit card with a bank account than prepaid debit cards. Prepaid debits has too many flaws with costs, etc, If you lose your prepaid card, you will be screwed. Too many loopholes!!!!!

Guest's picture
bob brown

i use one of these for online shopping, much safer.

if the card DOES get cloned, then they can only spend whatever's on it.

so yes, i reckon it's worth the 50p per transaction charge.

Guest's picture
Olivia

I use cash. It can be lost and spent just as easily as a pre- paid debit card without the fees.

Guest's picture

I have worked as a marketing and product manager for financial institutions throughout my 15 year career. I have spent a lot of time marketing the features and benefits of banking products such as credit cards, checking accounts, CDs, saving accounts, brokerage accounts, etc.

Recently, I've decided I want to transition my career from a corporate job to being a freelance writer. This is not something I can do overnight, I have to find clients willing to take a chance on me.

As it would happen, my first assignment is writing for a prepaid debit card called Mango Money by MasterCard. What's interesting about this assignment is I've chosen to incorporate the debit card into my budget. It gives me a chance to really experience what an actual customer goes through.

Becoming educated about the fee structure is critical to avoiding the fees of a prepaid card. Regardless of what prepaid debit card you decide to use, memorizing how fees are assessed is essential to your success!

I use my prepaid card in place of my weekly cash allowance which is the perfect budgeting tool for me. Here are a few best practices that I’ve learned:
1. Because my bank charges a transfer fee of $3, I only load money onto the card once month (Direct deposit my paycheck it is free)
2. I avoid using ATM machines for cash and instead get cash back from my grocery store purchases
3. I check my balance regularly by sending a text to Mango instead of an inquiry at an ATM machine (free)

Unlike most prepaid cards that I’ve researched, Mango doesn’t charge registration, activation, or transaction fees.

I don’t know that a prepaid debit card is cheaper or better than a bank debit card; in my opinion, they aren’t necessarily intended to serve the same purposes. You just need to figure out what financial tools work for your specific situation to stay on budget!

All my best,
Kim

Guest's picture
Paula

Because of bad credit I couldn't get a credit card and there are times when I need one. So I investigated this option.
I started out with a card from Green Dot. You can get them from most drugstores with all of the other giftcards and prepaid phone cards. Yes there is a fee to set it up and a fee to load money. I think there is a fee to take money out from an ATM.
With Green Dot, there were two instances of someone trying to use my card. First they tried $30, then $20. At the time I had $5 on the card so it was not big deal. I went on the Green Dot website to report it and I couldn't find any place to do so.
Now I have a prepaid debit card from AAA. There was a fee to set it up. But there have been no more fees, to deposit money or anything. It's AAA's modern version of traveler's checks. And it's a real VISA card.
But I especially like it for online purchases. And they want to know if anyone other than me tries to use it.
Also, Green Dot does send you a card with your name on it. The AAA card says TRAVEL CARD on it and they don't send you one with your name.

Guest's picture
Guest

I live in a tiny town with no big-box store and few others, and have a family-violence problem which necessitates living "under the radar" and leaving as few public records as possible. The pay-as-you-go fee, combined with eBay, Buy.com, and other bargain sites, costs me less than the gas to the nearest population center plus the big-box store prices, combined. If you can arrange direct deposit of payroll to the card, you have no charge for loading the cards.

For persons in my condition, I would suggest researching all cards to determine that reports to the credit bureau are neither given nor requested. If you have a credit problem but not a safety problem, a collateralized credit card, to rebuild credit, definitely would be a better deal.

You cannot transfer money from these cards to an IRA or 401k and this is a definite drawback to utilizing a card as sole financial services provider.

Guest's picture
J. Kumm

For some folks it's about more than the fees. I think the risk of overdraft fees alone usually can make the prepaid accounts competitive. But, there are other factors that make prepaid accounts attractive.

Customer Service: In my experience, banks are less interested in satisfying their customers because of all the inroads to other accounts and because of the longer-term relationship. They assume you will be a customer for a long time and treat you that way as well.

Benefits: Most prepaid accounts have additional benefits. My account gives me wireless credits. My other account gives me a much higher savings rate than I can get at a bank right now. So, there are other reasons to use these cards that banks just don't seem to be on the ball with.

When is it time for a prepaid debit card

Guest's picture
Melissa S

I really don't see the competition at all here. I have a bank debit card: it's free, my account is free, I don't have a minimum required amount, and I've never once had an overdraft fee. Seriously, how do these prepaid cards even stack up if you shopped around for a good bank in the first place?

Guest's picture
Guest

These cards are a scam. It's just another way to drain us dry. They are targeted towards the poor....people with no credit, no bank account, etc. They hope to snare you, then confuse you with a complicated fee structure. They assume because you have little money, you are a fool and will make for easy prey..Are you a fool? ...Do you have one of these in your wallet?

Guest's picture

Not all prepaid cards are cost-effective compared to a bank debit card, or to a checking account combined with an ATM card.

Cards available on J-hooks at retail location carry the inventory and retail distribution costs required to place them there. By contrast, cards available only online are cheaper.

Some prepaid card programs were born almost 10 years ago, in the ways when cloud computing and modern processing platforms were not available. So, to cover the costs of somewhat obsolete infrastructures, some of these cards have numerous fees: activation or purchase fees, "convenience" fees, etc..

Just shop around for the cards with the lowest fees.

Guest's picture
Guest

I have had a netspend visa prepaid card for about a year and other than one issues of them paying something without the money being in my account, but witout an overdraft fee like a bank, I love my card. I do not have to worry about overdaft fees that constanly keep me in the hole, I'm able to get direct deposit from my employer, I pay the 9.95/month fee that I dont see on the day I want it to come out, and that's it, I use it just like a bank card with out the hassel. If i cant get to the internet to check my bal. then i can get in a text for free, if I'm low on money I can get an relative to load money on my card less the western union or money gram from anywhere in the states, so I would go with this prepaid card anyday over a bank. oh yeah there are no hidden fees, if the 9.95 is not in there when they go to draft there is no fees for it not being in there they just draft it out when there is money, and you can stop it at anytime.

Guest's picture
Josh

You need to look online for the best value for prepaid cards. Some cards have no monthly fee and no signature cost for transactions when you add your paycheck to your card or load a certain amount of cash each month. Check out the Bank Freedom prepaid mastercard, theres is the lowest priced card Ive seen out there.

Guest's picture
Alicia

I'm 21 and I've been using my Netspend card since I was 18. I don't mind the $10 fee and direct deposit is free. I understand why someone more fiscally responsible would have a problem with the program. I also believe for a young adult terrified by the thought of debt, it helps.

Guest's picture
David

Prepaid cards like the MiCash card can make life easier for people who have trouble getting a credit card or who may not want to use a credit card. They are also a benefit to the "unbanked" who often have trouble getting a checking account and hence a traditional debit card. Yes, they come with fees--which vary from card to card--but the prepaid debit card companies can only stay in business by generating some revenue through these fees.

Cash works for some folks, but it's hard to buy things online with cash. And some people don't like to carry around a lot of cash. Also, check cashing fees can be expensive, so having your pay direct deposited to an FDIC insured prepaid card can eliminate check cashing fees.

Guest's picture
Guest

well, it could actually be way cheaper than a bank. i got the mango debit card.
free to load if you do it thru direct deposit, lso free.
no fees for swiping or pin number... Free
no overdraft fees of course..............free.....
only is $5 bucks a month if deposit less than $500 a month if you deposit $500 a month then it's free too..... so that's pretty cool, specially for someone that has issues opening a bank account because im in the check system, guess from what? the same banks closed 2 checking accounts because i refused to pay their overdraft fees.... so im happy with my card.

Guest's picture
Guest

When it comes to fees, I'd much rather know that I have a limit and can't go beyond that (like cash) instead of paying $50.00 for $0.07 (yup, I've had it happen.)

There are better cards out there... For instance, Visa Only1 cards. I've used that for years and have never had an issue with it.

The fees with that are simple:

- You pay $10.00 to get the card.
- You pay $4.95 to reload it (unless you have direct deposit)
- You pay a monthly fee for EXTRA protection ($4.95) but only if you want to pay for it. The card itself is protected as it is, but you can opt for a higher grade protection level for a small fee every month.

A bonus is that just about all grocery stores carry these now and it's very easy to load money onto the account.

Over all I found this to be safer then a bank card. However, if you want to get checked for credit (like for a loan) this doesn't count towards that.

Guest's picture
Guest

Well your actually not completely accurate. I have netspend thru a local grocerystore logo chain called Heb and its free to load my card. The monthly fee is less than six dollars and heb ATM is almost at cost.,plus the savings acc
t at netspend is 5% apy. Try finding that at ur soo called legitimate bank. And lets talk about that dirty little bank practice all banks play? Its called incorrect balance amounts so u easily go over ur acct balance causing an overdraft fee? What u think banks don't lie to screw u like credit card companies who say they didn't get ur check ontime? Plus when u realize that netspend offers free direct dep and free life insurance as a perk for that direct deposit any idiot still using a bank is dense.