The true costs of prepaid debit cards

By Felix Salmon
February 1, 2012
Anisha Sekar of Nerdwallet has officially launched a comparison tool which allows you to work out which prepaid debit card might be best for you -- and, crucially, allows you to compare the cost of a prepaid debit card to the cost of a bank account.

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Anisha Sekar of Nerdwallet has officially launched a comparison tool which allows you to work out which prepaid debit card might be best for you — and, crucially, allows you to compare the cost of a prepaid debit card to the cost of a bank account. Nerdwallet has run the numbers about as many ways as is humanly possible, and has come to the empirical conclusion that it “is very rarely the case” that prepaid debit is cheaper than checking.

Suze Orman and other prepaid-debit apologists, of course, won’t agree with Anisha here. They’re all convinced that even if checking accounts don’t have higher-than-prepaid-debit fees now, they will in future. And that therefore it’s a good idea to switch to prepaid debit now, before you get hit with those hypothetical future fees.

But the fact is that checking accounts, now and for the foreseeable future, are nearly always the best bet for people who want to maximize the number of things they can do with their money, while minimizing the amount of money they’re paying for the privilege.

I encourage you to use the Nerdwallet tool yourself. It has a bunch of default settings which may or may not correspond to your own particular circumstances, but even those are very interesting. For instance, Suze Orman, pushing her card, says you should never pay more than $36 per year in fees. But under Nerdwallet’s defaults, her card ranks 11th out of 46 cards, with fees of $192 per year.

How come? Well, the one thing that everybody needs is cash — and so Nerdwallet assumes that you’ll make two ATM withdrawals per month. And it also assumes that you need to put cash onto the card as well — and that you’ll be doing that by reloading your card twice a month at $125 a pop. All of those transactions cost money. In order to bring Orman’s card down to $36 per year, you have to never reload your card; instead, you have to set up a direct-deposit operation where your paycheck gets automatically deposited onto your card. That, in turn, allows you to use in-network ATMs at no cost.

Are you willing to do all that? In that case, push the “cash reload” slider down to 0, and switch the answer to “Will you use direct deposit?” to “Yes”, while selecting some non-zero amount for that deposit, say $1,000 per month.

Now, Orman’s card looks much better — and does indeed charge only $36 in fees. But that’s still only good enough for 5th place. The Green Dot card is the cheapest, at $5 per year, while Capital One and American Express both have options running about $2 per month.

Then, click on the button saying that you want to compare debit-card options to checking-account options. At that point, Perkstreet’s checking-account debit card immediately tops the list, costing absolutely nothing; indeed, its cost is negative, since it rebates money back to you every time you use the card. Capital One and Bank of America, too, offer online checking accounts which are genuinely free. And the Suze Orman card is now down to 8th out of 57 options.

The fact is that debit cards, just like checking accounts, will happily let you run up enormous fees if you’re not careful. And they never allow you to do simple things like deposit checks or cash at no fee — something that all checking accounts do as a matter of course.

In principle, it shouldn’t necessarily be this way. Checking accounts are inherently quite expensive things, involving statements and branches and a lot of bank infrastructure which prepaid debit cards don’t need. On top of that, prepaid debit cards get much more interchange income for their issuers than checking-account debit cards do, since they’re not subject to Durbin Amendment caps.

Certainly there are bad-deal checking accounts out there, and if you have one, you should close it. But between online bank accounts and your friendly neighborhood credit union, it’s extremely unlikely that a prepaid debit card is your best option. Being banked is nearly always better than being unbanked. So move your money to a bank which doesn’t charge you fees, rather than moving to a prepaid debit card.

Prepaid debit cards can be useful for purposes other than replacing a checking account, of course, but they still charge fees. So if you’re thinking of using a prepaid debit card as a way of paying your child’s allowance, then fire up that Nerdwallet tool, and work out which one is cheapest. And, at the same time, ask yourself whether a checking account might not be better in that case, too. Not all checking accounts are good. But many are. And most prepaid debit cards are pretty bad.

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