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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Comments
17 comments so far

Checking accounts are very cheap if you use them responsibly. Some will even pay you interest!

The problem is that people lose track of their balances and end up being hit with overdraft fees.

Posted by TFF | Report as abusive

I’m going to take a wild guess that people who read financial industry blogs are not the target market for these products? That the people who are the target market for these products are more likely getting their furniture at Aaron’s than Design Within Reach?

Posted by Moopheus | Report as abusive

Apparently, people who read Suze Orman in whatever format are a target market for her card. Probably we should leave the class signifiers attached to Aaron’s and Design Within Reach out of it, but some number of people who at the moment are living bump to bump — whether that’s paycheck to paycheck, or gig to gig or whatever — are seeking cheap, reliable financial advice geared to those of modest means.

The next issue is that since this demographic isn’t usually willing to pay $1,500 annual subscriptions or to sign up for umpteen dollars of money management advice, how does someone targeting this market get paid? And so we get unsavory schemes, ridiculous-looking fee structures and (I am looking at you TFF) “Well if they would just be responsible, they wouldn’t trigger this goofy overcharge. They must be bums.”

Finally, there is some mobility in and out of this class of modest means. It is not a bunch of dummies sitting there completely incapable of understanding that everything available to them is disadvantageous.

Posted by SelenesMom | Report as abusive

So what exactly are the benefits of this supposed to be? I don’t understand. Get a checking account, and if you don’t have the ability to manage that you should probably be still living with your parents and giving them all your money to manage.

I think my checking account is free and even pays me some trivial amount of interest (that amounts to maybe 2 or 3 pennies a year on a fairly large balance).

If you are living paycheck to paycheck you need to wildly scale back your consumption. You can live comfortably on extremely little income if you are disciplined.

Posted by QCIC | Report as abusive

QCIC, your post reveals that you are a single male under the age of 35, without a girlfriend. And you have no ability to imagine yourself in other circumstances.

Other humans have to raise families on family income of $30,000-$50,000 per year. And families cannot “live comfortably on extremely little income if you are disciplined.”

I agree with your point about the superiority of checking accounts and the need for people to be responsible to balance them, but life is much more complicated than you appear to understand.

Posted by Dollared | Report as abusive

Problem is that lots of people can’t open checking accounts. Bad credit history, bankruptcy, passing bad checks – lots of things will cause the banks to just say ‘No, thanks, we don’t want your business’.

Prepaid debit cards are then one of your only options.

Posted by lscott | Report as abusive

“Well if they would just be responsible, they wouldn’t trigger this goofy overcharge.”

Don’t debit or write checks against money that isn’t in your account? Seems pretty straightforward to me, even if it takes careful accounting…

Yeah, I know, there are times when you want to write a check against a deposit that hasn’t yet cleared, hoping that it will float for a couple days. But you also know that will get you in trouble very quickly. I’ve spent years in that “class of modest means” myself. Those were the years that I balanced my checkbook daily.

Might I speculate that debit cards are a big part of why people get in trouble with checking accounts?

Posted by TFF | Report as abusive

Dollared-

Married with kids, (I am 30 though). We have 2 homes we pay for (we had to move because one of us got promoted, so we rent one out). My kids cost maybe $5,000/year over what I would otherwise be paying (almost entirely healthcare/food/clothing/daycare).

In my early 20s I was able to live in a 850 sqft apartment in a major metro area with an income of about $18,000/year. I was working only about 6 months/year. So if I had a wife and kids we certainly could have stayed in my apartment on say S25,000/year. Kids are not that expensive unless you make them be. I make most of my kids toys out of wood and/or cardboard, they like them fine (2 and 4).

Most people I know who are “poor” and have “financial troubles” live in living situations much more expensive than they need, eat food more expensive than they need, and buy all kinds of consumer crap that gets then nothing.

A adequate apartment, broadband internet connection, 10 year old Honda and rice+meat+veggies for every day cost maybe $15,000/year. Anyone can afford that and it is a an absolutely first class quality of life. If you are going to have kids you need to make a little more, but honestly if you are only making $15,000 or $20,000 between you and your spouse it should be illegal to have children. It is wildly irresponsible.

Posted by QCIC | Report as abusive

“A adequate apartment, broadband internet connection, 10 year old Honda and rice+meat+veggies for every day cost maybe $15,000/year.”

If you add health insurance, it comes to a bit more…

“if you are only making $15,000 or $20,000 between you and your spouse it should be illegal to have children”

And if you had a better job, which you lost, then… What? Drown them? Put them up for adoption?

Posted by TFF | Report as abusive

I have no clue as to what Aaron’s and Design Within Reach refer to . . . perhaps that makes me classless.

I have to go with SelenesMom here. I have friends in the $150K income range in an average cost of living area who are a paycheck or two away from a crisis, because that’s how their parents managed their finances. Most people run their finances within their spere of knowledge and experiences. It took me 2+ decades to break free from my past, even though my income is several times my parents. We aren’t rational and educated in managing our money. We do what we know, and if we Suze is in our comfort zone, that represents our state of the art.

Posted by Curmudgeon | Report as abusive

TFF-

Honestly people shouldn’t really be out of work for long. Even in this economy anyone who really wants a job can find one. Apply to 10 jobs a day at $10/hr. You will find a job in less than a month. It will be a job you won’t like, but that is why they pay you. Perhaps you should have paid attention in school?

Unemployment among college graduates has barely breached 5% in most places even in the darkest depths of this crisis. You really want to admit you are 20th of 20 among your peers?

Everyone I have ever known who was unemployed was unemployed by choice and could have gotten a job if they lowered their pay expectation to say 60% of the job they lost. People just aren’t willing to control their behavior, so then they “need” to make the same pay. So then they stay unemployed.

Posted by QCIC | Report as abusive

QCIC, add $15,000/year for health insurance and out of pockets (family of four), and $3000 year for very modest retirement savings and $5000/year for very, very modest children’s college savings, and $3000/year for taxes, and we add $26,000/year to your Walden Pond lifestyle. I agree it can be done -at just over double your number. And that assumes your children participate in no sports or camps or music or computer club or other extracurriculars and your spouse does not work, so you have no childcare expense. So tell all of us who didn’t pay attention at school – how does it work for two “disciplined” spouses with two children to each get jobs at $10/hour with no benefits? How does “discipline” pay for health care, college and retirement?

Posted by Dollared | Report as abusive

“Everyone I have ever known who was unemployed was unemployed by choice and could have gotten a job if they lowered their pay expectation to say 60% of the job they lost.”

Wow, QCIC, you live in a world of infinite choice and unlimited resources. Please let us know how we can all live there.

Posted by Dollared | Report as abusive

QCIC, like you I am one of those people with bountiful opportunities. I have some marketable skills, engage my career with a passion, and don’t have preconceptions about what I’m worth (or at least I don’t let those stop me from taking a worthwhile job).

Most recently, that has led me to teach at an inner-city school. The students aren’t all poor — mostly they come from working-class backgrounds. But some of them exist solely on public assistance. It is NOT true that everybody is employable. Some have physical disabilities and no marketable skills. Some are fighting cancer. Many/most of our students come from single-parent households.

If you want to invent new crimes, don’t focus on income. Focus on those parents who are unwilling to put the needs of their children first and foremost in their life. The abandoned youth wears a different face in the city than in the suburbs, but neither is an acceptable situation. And I’ll attest that it is better for a child to grow up poor with a single mother who CARES than to grow up with two upper-middle-class parents who are so consumed with their own lives that they just don’t give a D. (I’ve taught some of those as well, elsewhere.)

Wish you could visit my school and meet some of these “worthless” people you denigrate. Might change your perspective a tad?

Posted by TFF | Report as abusive

TFF- My “opportunities” were being raised by a single mom who was passed-out drunk every day, and getting a 2.3 in HS when I could have gotten a 4.0 putting in ,5/hrs of work/day.

Then I got into the real world and had to support myself. I work for $6/hr full time for a year, it was hard, so I went to hide in college. I still didn’t have enough discipline to make close to the most of it (spent a lot of time chasing women and playing games), but got a 3.7. Then I worked part time and lived in a large 2 bedroom apartment in a major metro, and lived a fine life even with a garbage liberal arts degree. When I decided I wanted a better job I quit, and sort of half halfheartedly looked (4 hrs/week) for a couple months, when my savings ran out I started really seriously looking (like 6 hrs/day) and found a job in 4 days.

When after a year at this better job I got laid off I again sort of half halfheartedly looked until my savings ran out, then once again I found a job within a week. This job was even better, but I wasn’t crazy about it and worked my ass off to parlay it into a better job with a different company. Once again applying for jobs at the rate of maybe 1/week provided little results even while employed, when I upped it to 20/week I found one almost immediately. Rinse, repeat. My wage per hour (without benefits) has risen in 10 years from 6 to 6.25, 8.50, 10.50, 12.50, 15, 16.50, to 20.

I am a smart guy and that helps, but I am still a little lazy (as you can see by me posting here instead of working through my 15 minute breaks), but mainly I just work as hard as everyone else and do a better job, and that is good enough to get promoted or get higher pay.

Once I got married to someone equally responsible our lives became easy street. More money that we honestly know what to do with.

And its not just me, I have seen the exact same thing happen again and again. Every friend I have known who was unemployed has found work when their savings/unemployment/friends’ charity ran out. Every single one. We are talking over a dozen people. My wife’s sister when to college to be an architect even though she is horrible at math. Needless to say after 6 years and 3 schools she had no degree and a pile of debt. So she tries for months and months to get internships or administrative positions at architecture firms. Finally she is completely flat-dead-broke. Next thing you know she has a job as a metal worker getting paid big money. What were the odds? Ditto a close friend, and my own sister. I could go on but this is already long.

Dollared-
“As $15,000/year for health insurance and out of pockets (family of four).”

My OOP for a family of 4 is about $2,000 (but that is the same with or without kids), plus another 4,800 in premiums, but they would be $3,200 without kids. Get better insurance.

“$3000 year for very modest retirement savings”
Your employer can cover part of this with benefits and you can cover part of it by living frugally. Saving for retirement is easy if you are debt free by 40. Do the math sometime.

“$5000/year for very, very modest children’s college savings”
Why on earth are you paying for your kids to go to college? A) Not everyone should go to college, we already send too many right now since the training is so non-technical. B) That is a horrible idea? Make them work and learn what the world is like ASAP. My kids are going to be given jobs by me at age 10 and will start paying for some of their expenses.

“$3000/year in taxes”
If you are making $20,000 your tax rate is near zero depending on where you live. In my state we have an income adjusted property tax based renter’s credit that basically covers the taxes of anyone making under $20,000 and that is without the EIC. So you are basically just paying sales taxes, and if you are that poor you shouldn’t be buying almost anything. At one point in my life I had 1 bowl maybe 5 pieces of silverware and most of my furniture was made of boxes. It was a fine life despite that.

When I was 20 I was this bleeding heart libertarian-communist. Railing against the injustice of the world. Now after 10 years of occasionally being poor myself, and working with a lot of poor people (my industry)…

Well I still want to solve those people’s problems and feel bad for them, but have come to the realization that they generally have more than enough opportunity to improve their lives if they so chose. I have watched too many people scraping to get by go to the casino regularly, or buy a brand new car right after they just had a huge check bouncing fiasco, or buy a top of the line TV when their old one is fine.

Posted by QCIC | Report as abusive

Then we are more alike in some ways than I thought, QCIC.

I’m not one to rail against the injustices of the world. It is what it is, and there has never been a better time to be poor. (Not that it is ever GOOD to be poor.)

I spend my days working with inner-city kids to give them that opportunity to improve their lives (if they chose). And hopefully helping them recognize and seize the opportunities offered by others. Better to find that path in high school than ten years later.

Don’t have much use for bleeding heart liberals who aren’t willing to get their hands dirty. Don’t have much use for conservatives who turn their backs either.

Posted by TFF | Report as abusive

I have just stumbled upon yet another questionable payment product, one called Shazam. It is a mobile payments platform that would enable a cardholder to make a payment, but only after the cardholder first receives a call from the payment processor to confirm her identity.

It seems to me that that the Shazam guys have completely missed a very important point when designing their service. It is that that convenience is valued extremely highly by consumers. I mean, do they really have to call us before each single payment is processed? http://blog.unibulmerchantservices.com/m -payments-provider-wants-to-talk-to-you- before-accepting-your-payment

Posted by D.D.D. | Report as abusive
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