Prepaid Card vs. Bank Account

Prepaid debit card use continues to grow, as an alternative to a checking account and in addition to one. Which is better? Here are the pros and cons of both.

Prepaid Card vs Bank Account

Prepaid cards have grown rapidly in popularity over the past ten years, both as a replacement for checking accounts and in addition to them. In fact, prepaid card use jumped 50% between 2012 and 2014, primarily due to increased usage by those who already had a checking account.

But how do prepaid cards differ from bank accounts? Do they offer similar services? And if you have one, do you actually need the other? Here’s what you need to know.

How Are Prepaid Cards and Bank Accounts Similar?

Over the last decade, prepaid cards have expanded services to look more and more like a traditional checking account. Both prepaid cards and bank accounts allow for direct deposit, bill pay, and online shopping.

When it comes to using cash, both have options. You can access ATMs with either a checking account or prepaid card. And you can deposit cash into your account or onto your prepaid card.

Many of the services consumers depend on from their bank can be offered with a prepaid card. But yet, they aren’t exactly the same.

What Are The Differences Between Prepaid Cards and Bank Accounts?

Prepaid cards are easier to get than checking accounts. Without the ability to overdraft or write checks, there is less risk to a prepaid card issuer than there is to a bank offering you an account. As such, you can get a prepaid card without a ChexSystems or credit check.

Alternatively, a bank account gives you more flexibility. You usually have access to a network of ATMs to withdraw cash with no fee, you can write checks, and even earn some interest, albeit a very small amount. On the other hand, you also can overdraw your account with checks or the account debit card. Which means the risk of high overdraft fees, something many users would like to avoid.

Common Problems With Checking Accounts

Fees: The most significant problem with checking accounts for users is the cost. According to MoneyRates.com, the average monthly fee is $13.24 per month or $158.88 per year.

That’s before overdraft charges. Overdraw the account, and you’ll be charged an average of $32.84 per occurrence–plus, interest on the negative balance until you pay it back. Make that mistake a few times, and it is easy to see how the average annual cost of a checking account in the U.S. is more than $329.

Identity theft: The other problem faced by checking account users is security. The debit card you use to shop is connected to your checking account. That means that if your account information is compromised, identity thieves can potentially get access to your entire account balance.

While banks offer fraud protection, there are limitations. With a debit card attached to a checking account, you have two days to inform the bank of a fraudulent charge in order to limit your loss to $50. After that, you’re liable for up to $500.

Even with those limitations fraudulent charges can lead to bounced checks and lengthy investigations. Many times, your account will be locked, limiting access to cash, while a bank investigates.

Common Problems With Prepaid Cards

Fees: Many users abandon checking accounts in favor of prepaid cards to avoid high banking fees. But prepaid cards can also carry high costs, just in a different way. Prepaid cards can have activation fees, monthly fees, transaction fees, reload fees and even fees to check your account balance.

There are often ways to waive some of these fees, but you’ll need to review the policies carefully to ensure the services you use frequently don’t carry high costs.

Limits: There is no restriction to the amount that can be held in a checking account, but there are upper limits on prepaid cards. Some cards, like the NetSpend Visa Prepaid Card, are on the higher end, allowing you to have up to a $15,000 balance. The average, however, is lower.

Prepaid cards also have daily spending limits, ATM withdrawal limits, and daily cash load limits. If you put a significant amount of cash on a prepaid card, you may not be able to access the total amount instantly.

Federal deposit insurance: FDIC guarantees the safety of funds in a checking account from bank failure. Most prepaid cards are protected by FDIC insurance the same as checking accounts. It’s required to qualify for Social Security and veteran benefit direct deposit. However, over two-thirds of card users don’t know this is the case.

To get this important protection, prepaid card users need to register their card. About half of regularly used cards today aren’t registered, meaning users are missing out on this safety feature.

If You Can Get a Bank Account, Why a Prepaid Card?

According to Pew Trust research, 73% of prepaid card users that use their card at least monthly also have a checking account. With so many similarities between the two, why might it be smart to have both?

Avoid Overdraft Fees

For those that struggle with overspending or staying on top of your account balance, a prepaid debit card can act as a way to save you from yourself. Attempt to spend more money than you have on your card and the transaction will just be declined. As a result, prepaid cards can avoid the risk of racking up high overdraft fees.

That’s not always true with prepaid cards, however. A few will allow charges that exceed the card balance and charge similar overdraft fees.

Some prepaid cards offer a small “purchase cushion” to allow a card balance to go slightly negative. But that is typically limited to about $10 and is a no-fee feature for users.

Budgeting

The envelope cash budgeting system, made famous by Dave Ramsey, has been instrumental in helping many families get out of debt. However, carrying cash is difficult to navigate in today’s online shopping, plastic-centric economy. Prepaid cards can allow users to load budgeted funds on a card for just a specific purpose, creating a restricted budget system without the cash.

Some prepaid cards even offer that feature. The Akimbo card, for example, offers “subaccounts” for any budget category that you choose. Transfer money into a named subaccount – like fuel or groceries – and even get a separate card for just those transactions. The FamZoo card offers its own brand of envelope budgeting with virtual subaccounts, called IOU accounts.

Famzoo budgeting

Some prepaid cards allow users to budget for spending goals by segmenting funds into a virtual vault, like the Walmart MoneyCard. Other prepaid cards even offer high interest-bearing savings accounts. Transfer money into these savings accounts to help you plan for a specific goal.

Identity Theft Protection

For consumers that don’t have or use credit cards, a prepaid debit card can offer identity theft protection when shopping online or in locations where fraud is prevalent.

With a traditional checking account and debit card, an identity thief could gain access to your private information and total funds. While you have certain protections, you could lose access to your primary source of cash while they investigate.

With a prepaid debit card, an identity thief can only access the amount you put on the card. No overdrafts. And if your prepaid debit card is part of the MasterCard or Visa payment networks, you might also have stronger purchase protection than your debit card can offer.

Summary

The combination of a checking account and prepaid card can help consumers who struggle with overspending and want to build better money habits. It can be especially helpful for users who don’t want, or have access to, a credit card but don’t want to risk their private banking information being compromised.

Before choosing either method, compare options and fees. Many checking accounts and prepaid cards have ways to waive fees for certain activities. Find a service that will allow you the access you need for the lowest cost.