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Prepaid Debit Cards vs. Checking Accounts: Which is Better?

Compare the differences between reloadable prepaid debt cards and checking accounts to find out which one offers the better fees and features that you seek.

You need an account that can act as the center of your finances -- an account to send and receive funds.

A checking account is the traditional option.

But, for people who cannot qualify for a conventional checking account, or choose not to open one, a prepaid debit card (prepaid account) makes for a viable alternative.

For the most part, these two accounts allow you to perform the same functions.

However:

There are key differences that can determine which one is better for the way that you have to manage your finances.

Prepaid Card vs. Checking Account

Feature Prepaid cards Checking accounts
Debit card/ATM access Yes Yes
Overdrafts No Optional
Check-writing ability No Yes
Direct deposit Yes Yes
FDIC insurance Yes Yes

What is a Prepaid Debit Card?

Prepaid debit cards are debit cards that are purchased at stores and that are not linked to bank accounts.

Examples include the Walmart MoneyCard and American Express Serve.

Like a standard bank debit card, you can swipe your prepaid debit card to make purchases. They typically work on the Mastercard or Visa network, which means they are accepted nearly everywhere that accepts debit cards.

When you purchase a prepaid debit card, you have to load it with cash to have funds available for spending.

As you spend the balance down, you can visit a participating store to load more cash on to it.

Using the card is more convenient than cash because you don’t have to carry a lot of bills. It can also be safer because if someone steals your card, they’ll need your PIN to make purchases.

You’re limited to spending only the balance of your prepaid debit card. You can’t make purchases on credit like a credit card.

Because you cannot spend more than you have on the card, you cannot overdraw the account. For that same reason, most prepaid debit cards do not offer the ability to write checks.

Anyone can get one

Prepaid cards are available to anyone who can pay for its costs.

It's part of the reason that people use it.

Look:

When you open a new bank account, your ChexSystems report will play a factor.

If your previous banking history doesn't look good, you can be denied a bank account.

Different from gift cards

It is important to note that reload prepaid cards are different from one-time gift cards that may also carry a cash balance.

Gift cards also work like debit cards, but you won't be able to reload them and conduct transactions such as accept direct deposit.

What is a Checking Account?

Checking accounts are a type of bank account designed for regular transactions.

They’ll generally offer debit cards that you can use like a prepaid debit card. You can swipe the card to make purchases or withdrawals from ATMs.

The difference is that you reload your checking account debit card by depositing money into your bank account.

Full service banking features

Checking accounts tend to come with many more features when compared to prepaid debit cards.

For example, you can manage your checking account through your bank’s website or app.

That makes it easy to deposit money by taking a picture of a check or to make online transfers to your savings account.

You can also get access to other services offered by your bank, such as bill pay services or financial management software.

Checking accounts are also typically the first type of account that people open.

Opening a checking account with a bank can start a banking relationship that will grow to include savings and investment accounts, credit cards, car loans or mortgages.

Similarities

There are a number of similarities between prepaid debit cards and checking accounts.

Debit card and ATM access

A prepaid debit card is, of course, a debit card.

That means you can use it to do debit card things, like make purchases at stores or make ATM withdrawals. The ATM network you can use and the fees you’ll pay will depend on the type of prepaid card you have.

Checking accounts almost always come with debit cards attached to the account. Most banks operate their own ATM networks that you can use without paying a fee.

If you use another bank’s ATM, you might have to pay a small fee.

FDIC insurance

Both prepaid debit cards and checking accounts can offer protection from the Federal Deposit Insurance Corporation.

Nearly every checking account in the United States comes with FDIC insurance.

And, because the funds in prepaid debit card are typically held in FDIC-insured banks, those funds are usually protected as well.

The fact is:

Having FDIC insurance is incredibly important because it means that you can’t lose money, even if the bank or company that issues your prepaid card goes bankrupt.

The FDIC insures account balances, up to $250,000, with separate limits per account type, per customer, at a bank.

If you aren’t able to get money out of a covered account because the account issuer has folded, the FDIC will reimburse you. That means you cannot lose money in an insured account as long as you keep your balance under $250,000.

Direct deposit

Most employers offer the option to sign up for direct deposit of your paychecks. This means that on payday, your money automatically arrives in your account.

You don’t have to physically pick up a check and deposit it to your bank accounts. The money is also available to spend immediately on payday. That can be important if you’re having trouble making ends meet.

You can sign up for direct deposit using both prepaid debit cards and checking accounts.

Differences

Just as prepaid debit cards and checking accounts have many similarities, they also have many differences.

Cost

One of the biggest differences between the two types of account is their cost.

Many banks offer low-fee or completely free checking accounts. These accounts might not come with bells and whistles, but they’ll get the job done.

These accounts are great for handling basic things like making purchases, paying bills, and receiving direct deposits.

Most prepaid debit cards have a lot of fees, including monthly fees, ATM fees, and cash reload fees.

Dealing with all of these fees means you’ll have less money to spend on the things you need because you have to pay for the privilege of having a debit card.

Overdrafts

Many banks will allow you to overdraft your checking account. That means that you can spend more money than you really have.

For example, if you have $20 in your account and try to make a $30 purchase, the bank might cover the extra $10 for you. Your account’s balance will become -$10.

You should try to avoid overdrafts whenever possible. Many banks charge fees of $30 or more for each overdraft, which is incredibly expensive. However, having the option can be good in true emergencies.

Prepaid debit cards don’t allow you to spend more than the balance you’ve loaded, so you cannot overdraft using one.

Lack of check-writing Ability

Checking accounts give you the option to write checks. Checks can be a good way to make large payments, such as rent. They’re also a good way to pay companies who bill you for service, such as utility companies. Simply write a check and send it in the mail.

Typically, prepaid debit cards don’t give you the option to write checks.

Reloads

To reload your checking account, all you have to do is make a deposit. This can mean depositing a checking, bringing cash to a bank, or receiving your direct deposited paycheck. All of these methods involve no fees.

With prepaid cards, it's different.

Prepaid debit cards can be reloaded with direct deposit, but to add cash to the card you have to visit a participating store. Most prepaid debit cards charge a cash reload fee of a few dollars.

Unless you’re adding large amounts to your card, you could be losing a significant percentage of your money to card reload fees.

Which One is Right for You?

Prepaid debit cards and checking accounts both have benefits and drawbacks. Either can be the right choice depending on your needs.

Prepaid debit card

Prepaid debit cards are generally worse than checking accounts, but they can be right for some people.

For example, if you have had a bank account in the past but had it closed due to unpaid fees, you might not be able to open a new bank account.

Again, ChexSystems is a system like your credit report, but instead of tracking how you manage debt, it tracks how you use bank accounts. If you’ve opened and closed lots of accounts or have outstanding bank fees, you’ll have a bad ChexSystems report.

This can prevent you from opening new accounts.

Prepaid debit cards don’t check your ChexSystems report, so you can open one without having to worry.

Checking account

Opening a checking account is the better choice if you’re able to.

They tend to be cheaper than prepaid cards.

You can also take advantage of the other services that the bank offers, such as savings accounts, investing services, or lending services.

Traditionally, banks also offer more account features and better advice than prepaid cards do.

Conclusion

Prepaid debit cards have their uses, but you’re probably better off opening a checking account.

They are less expensive and far more flexible.

If you cannot open a checking account, a prepaid debit card can help you avoid carrying cash and let you make online purchases. Still, you should work towards being able to open a checking account to take advantage of its benefits.

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