Can Prepaid Cards Replace Checking Accounts?

Prepaid cards have been heavily criticized for the amount of fees they carry. However, considering the increased cost of checking accounts, prepaid cards may become more attractive. Walmart and American Express have introduced a prepaid card intended to rival checking accounts. The card claims to have significantly lower fees that other prepaid cards and even lower fees than checking accounts.

If you're a current bank customer, you may have already realized that free checking is disappearing. A recent Bankrate.com survey revealed that only 39% of banks offer totally free checking accounts. The same survey says the average checking account can cost $65 per year. One study referenced by Forbes.com reveals that consumers pay an average of $259 per year for basic checking account. Annual prepaid card fees range from $35 to $450 per year, depending on the card and how you use it.

According to the Federal Reserve, 17.8% of households had a prepaid debit card in 2011, compared to 12.2% in 2010. So the trend toward prepaid cards over checking accounts isn't new. More consumers may turn toward prepaid cards as banks continue to raise prices. But are prepaid cards really any better?

Whether you can replace a checking account with a prepaid card depends completely on the card and how you use it. Some prepaid cards start out cheap, but get expensive based on your usage. For example, cards may limit the number of free ATM withdrawals, purchases, bill pays, or customer service calls you can make. After you pass the limit, you’ll start paying a fee for those transactions.

It's more expensive to load cash onto a prepaid card. You'll have to purchase a reload card from a retailer to add cash to your prepaid debit card balance. Banks rarely, if ever, charge this type of fee for depositing cash into your checking account.

Usage limits are common with prepaid debit cards. There may be a limit on the card value (how much you can have on the card at one time), the amount you can spend each day, the amount of cash you can reload onto the card, and the amount you can withdraw from an ATM. Some prepaid cards have generous limits or no limits at all. Others may impose strict limits, like $500 maximum cash reload and $2,500 maximum card value. If your monthly pay is higher than the maximum card value allowed, you should pick another card or keep your checking account.

One benefit of prepaid debit cards over checking account: no overdraft fees. Transactions that exceed your prepaid debit card balance will be declined. You have this option with a checking account, but you have to express to your desire to opt-out and that only applies to debit card transactions. Checks can still overdraft your checking account.

Many people have sworn off big banks and understandably so. Then banking landscape has changed dramatically within the past few years. But major banks aren’t the only banking option available. Local banks and credit unions typically offer better deals. Many of the larger credit unions still offer totally free checking accounts, the kind that do not require you to jump through hoops to avoid the fee.

A segment of the population may be able to survive with just a prepaid debit card. If you learn the rules, you can avoid most of the fees and minimize the cost of the card. However, most people will still need a traditional checking account.