One of the trends gaining a little traction right now is using prepaid debit as a replacement for a checking account.
While a prepaid debit card can be useful in some cases, it might not always be the best way to handle your finances.
Prepaid Debit: Replacing a Checking Account?
In recent years, prepaid debit cards have evolved into products that can function as checking accounts. You can arrange to have your paycheck directly deposited to your prepaid debit card, and you can use your prepaid card anywhere that accepts credit cards. Some prepaid debit cards even come with a savings account option — complete with an APY (if you choose the right card).
It’s even possible to find some prepaid debit cards that waive monthly fees, or have fees of between $3 and $5. For those who don’t want to pay fees of between $7 and $9 a month for a checking account, a prepaid debit card can seem like a good options.
Pitfall of Prepaid Debit: The Fees
Many prepaid debit cards (particularly those that are endorsed by celebrities) come with a number of fees. Some cards have more than 20 fees that you are subject to! From fees charged when you open an account to monthly fees to fees for reloading your card to fees for checking your balance, there are a number of ways to pay for access to your own money.
If you decide to use a prepaid debit card as a replacement to your checking account, forget about the cards pushed by celebrities. Instead, look for low-key cards, like the Green Dot card, and some of the cards from American Express. Mango Money can also be a good choice. These cards charge fees, but they are generally low, simple, and restricted to only a few actions. Plus, some of them waive fees when you make a certain number of transactions, or arrange for direct deposit to the card.
Who Should Use a Prepaid Debit Card?
You can still find free checking accounts, but in some cases they can be hard to qualify for. If you have credit problems, or if your account has been flagged in ChexSystems, you might not be able to open a free checking account.
Instead, your only option might be a second chance checking account. These accounts, aimed at those with lower incomes and credit issues, can be expensive, charging up to $15 a month for an account. If you are in a situation where your checking options are limited, a prepaid debit card can be a good choice.
Pay $5 a month for prepaid debit card beats paying $11 to $15 a month for a second-chance account. Plus, with the prepaid debit card, you can take advantage of free direct deposit and avoid the hefty fees often charged by check-cashing businesses.
Find out if you can get a free checking account. If you can’t, and you are truly “unbanked,” it can make sense to go with a prepaid debit card. In these cases, while you work to rebuild your financial reputation, a prepaid debit card can replace a checking account.