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Friday, May 6, 2011

What Is Better: A Prepaid Debit Card Or A Checking Account?


Prepaid debit cards are an ideal choice for people with challenged credit that would like to make purchases online or in stores accepting credit. Prepaid cards are typically issued by banks, program managers in conjunction with the major credit card brands, and can be used where those brands are accepted.

A prepaid debit card works like a checking account debit card does, except there is no bank account required. If this type of debit card works the same as a checking account does, why should someone choose a prepaid card over a checking account?

As with any financial tool, there are positives and negatives the be considered with both prepaid cards and checking accounts.

Checking Account

Pros
  • Provided you do not overdraft your account and carry a higher balance, the fees for a checking account are typically minimal.
  • A checking account with a bank is almost always FDIC insured.
  • Some checking accounts now gain interest. A prepaid card never offers an interest payment. Note, though, that interest on checking accounts is generally very low.
Cons
  • There is a trend towards adding fees to checking accounts now, with banks seldom offering free checking with no stipulations. The cost of a checking account can run between $200 and $300 a year, and that is for a basic, no-frills account. Many of these fees can usually be associated with overdrafts.
  • Checking accounts often allow one to overdraft their account, and then charge a fee for "overdraft protection", usually $30 to $40 per over charge. This can add up quickly if a person doesn't realize they're over spending or make a mathematical balancing error, and a day of shopping can mean hundreds of dollars in penalties.
  • If you've had consumer debit problems in the past, you may not be able to open a checking account. Often, if you have had overdrafts that you did not deposit money to cover on an old account, you'll be placed on the Chex Systems list and a bank will deny you a checking account.
Prepaid Debit Card

Pros
  • While there are fees associated with a prepaid card, the fees can run from about $75 to $250 per year. Provided you use direct deposit to keep the fees down, and shop around for a debit card with the lowest fee, you can save a substantial amount of money going with a prepaid card over a checking account. You can also use tricks like getting cash over at a merchant rather than being hit with those pesky ATM Withdrawal fees.
  • Typically, prepaid debit cards do not report to the three major credit bureaus, but might offer alternative credit reporting (like rent and utilities) to a PRBC Agency.
  • Usually, there is no danger of overspending with a prepaid debit card, because you will not be able to spend more than you have loaded on to the card. For people who have trouble controlling their credit card spending, a debit card offers convenience while only allowing access to money they already have available.
Cons
  • If you do not have problems with overspending on an account, a basic checking account might provide lower fees. This depends entirely on a person's individual spending habits.
  • Some prepaid cards are not FDIC insured. Most are, however, but research a prepaid card before purchasing.
  • Prepaid cards that are sold at retail stores will not have your name on the card, and some stores or online merchants will not accept this type of debit card.
  • Many prepaid cards now have advanced account management functions, rewards programs and SMS text/email alerts letting you know balance information.
If you are someone who has had problems with overspending in the past, a prepaid debit card is a better solution than a checking account. Spending is kept in check, and there are no overdraft fees to worry about.

Tracy Jones is a content contributor for GetDebit.com, which provides information about prepaid products, including the Univision MasterCard prepaid debit card.

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