Prepaid card vs. debit card: How do they stack up?

When you're trying to stick to a budget, any trick that might help you curb your spending habits seems worth trying. Prepaid cards, which are often reloadable, may look like an easy solution. You can only spend as much as you put in, so there's a built-in limit. On top of that, if you're sick of dealing with bank fees, prepaid cards can be used as an alternative to banking.

For clarification, a prepaid card is also referred to as a 'prepaid debit card,' but for ease of reading, this article uses the term 'prepaid card' to distinguish it from a debit card connected to a checking account.

It sounds like a perfect budgeting solution, right? Not necessarily. Prepaid cards aren't as straightforward as they seem. They can quickly turn into a much worse deal than sticking with a debit card tied to your checking account.

Prepaid card shortcomings

Nerdwallet took a look at what they determined to be the top five prepaid cards on the market and found several ways they compared unfavorably to traditional banking:

All five charge fees of some sort.
More than half have monthly maintenance fees, often charged whether or not a card is used during the month.
Because many of the companies who provide them partner with big-name card companies, such as American Express, usage locations may vary.
With the exception of payroll or government-issued prepaid cards, the user must register the card to protect themselves from loss.
The fees they charge are complicated and often unexpected. You can be charged for simple actions like activating your card, adding money to your card, taking cash out at an ATM, and checking your balance online.

On the upside, once your prepaid card is out of funds, your spending stops. There are no overdraft fees or NSF fees because your transactions are automatically declined.

Advantages of checking account debit cards

Tied to checking accounts, debit cards do often come with some banking fees, but with most accounts, these are relatively upfront and easy to understand.

It's worth comparing monthly bank fees to prepaid card fees. If a checking account charges monthly banking fees, as is the case at many megabanks, those often come out to a little less than $10 per month. With community banks and credit unions, the average is closer to $6 a month. Those amounts could be even lower at a community financial institution that offers free accounts with no monthly fees, like Kasasa accounts.

As annoying as many banking fees are, at least banks won't penalize you for basic, necessary functions like putting more money into your account or checking your balance online. You can check your account as often as you need, without having to pay extra for the privilege. You can also use automation features like scheduled payments and transfers. Plus, you can set up notifications from your bank's online banking to provide you with regular alerts and updates.

Saving money and simplifying your finances shouldn't have to cost you extra. Where prepaid cards and some debit cards saddle you with endless fees for using and saving your own cash, community banks and credit unions that offer reward checking like Kasasa Cash Back^® would rather reward you for the same actions.

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