Prepaid debit cards can be cheaper than checking, says study

Close-up of the logo corner on a Visa debit card.

Prepaid debit cards can be less expensive for customers with direct deposit. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

While conventional wisdom suggests that prepaid debit cards aren’t the cheapest means of managing your transactions when compared with a checking account, the truth is that we are living in extraordinary financial times. According to a recent survey by Atlanta-based financial management advisory services company Bretton Woods Inc., the amount of money you keep in your checking can make choosing prepaid debit a cheaper option.

Low checking account balances are expensive

The Bretton Woods survey compared three types of consumers who carry low balances: those who use reloadable prepaid debit cards, those who rely on checking accounts and those who only use cash on hand. Those who rely upon checking paid almost 40 percent more in fees than those who used prepaid debit cards. Here’s how they compare, in terms of projected monthly costs:

  • Consumers using prepaid debit cards with direct deposit: $8 to $20
  • Consumers using checking accounts, low-balance: $15 to $37
  • Consumers using cash-based services (like check cashing): $9 to $48

Bankrate notes that while prepaid debit cards are shown to be less expensive than checking when there’s a low balance, the assumption made by the survey is that low-balance checking customers will incur an average of five overdraft charges each year. This also assumes that these customers have given their bank permission to charge for overdrafts on debit card transactions. Overdrafts on checking and ACH withdrawals can occur regardless, however.

Prepaid debit cards courting disgruntled bank patrons

Free checking accounts are a dying breed, and banks are adding fees in the quest to make up for lost revenues. The result is that many traditional banking customers are dissatisfied with the service, and prepaid debit card companies are cherry-picking customers. The unbanked are also using prepaid debit in record numbers, according to Bretton Woods, and such customers noted that they appreciate the ability to manage their money, control spending and avoid interest charges that credit cards would charge.

[Installment payday loans equal flexibility]

Those on fixed incomes look forward to being able to move Social Security payments to direct deposit on products like prepaid debit cards, notes Marketwatch. The move would save taxpayers $125 million a year in banking fees, according to the U.S. Treasury.

“Not only is there is a cultural shift happening in the way businesses and governments manage their payments, but also in the way people manage their finances. Many young people today have never set foot in a bank or written a check, while others are choosing prepaid cards because they either can’t qualify for a bank account or don’t want to pay rising checking account fees,” said Kirsten Trusko, President of the Network Branded Prepaid Card Association.

Prepaid debit card savings programs

In addition to the benefits of avoiding excessive banking fees associated with many checking and standard debit card accounts, the New America Foundation notes that some prepaid debit card programs give customers the ability to watch their money grow via a savings program. When an automatic transfer into the savings account is set up, the need to marshal the discipline or remember to make the transfer is eliminated.

Prepaid debit as an alternative to checking



Bretton Woods Inc.


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