Prepaid Cards vs Bank Account

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By Consumers Union on Monday, April 4th, 2011

Most prepaid cards charge higher fees than basic checking accounts offered by the top five banks in the U.S., according to a new analysis(pdf) we released today.

While some banks are beginning to charge new fees, we found that consumers will save money and enjoy stronger protections with a basic checking account compared to a prepaid card, especially if they take some simple steps to minimize fees. Some prepaid card issuers do such a poor job disclosing fees that consumers may be surprised at how quickly fees can add up.

We tallied the cost over the course of one year for a consumer who opens an account and each month pays three bills (two online, one by check) and makes eight point of sale purchases, three ATM withdrawals, two balance inquiries, and two deposits. Based on this hypothetical consumer, we found:

Assuming consumers took steps to minimize their fees as much as possible, all of the checking accounts offer a cheaper deal than 10 of the 12 prepaid card programs. Wells Fargo and Bank of America are cheaper than all 12 prepaid cards if the customer avoids monthly fees and non-network ATM fees. Western Union and H&R Block are cheaper than the checking accounts offered by Citibank, US Bank and Chase.

In order to minimize checking account fees, bank customers would have to avoid the use of non-network ATMs and take the steps necessary to waive the monthly fee. In the case of prepaid cards, customers would have to avoid using non-network ATMs for balance inquiries and cash withdrawals, and reload their cards using direct deposit only in order to minimize fees.

Assuming consumers took no steps to avoid fees, all of the banks and credit unions we examined were cheaper than nine of the twelve prepaid cards. The prepaid cards offered by WalMart, H&R Block, and Western Union were cheaper than the checking accounts we examined at Citi and Chase for those customers who took no steps to avoid fees.

Even if checking account customers pay a monthly fee, they are better off in most cases than many of the prepaid card customers who take all of the steps they can to avoid fees. Under this scenario, all but one of the checking accounts we analyzed (Chase) cost less than six of the 12 prepaid cards.

The costs at the two credit unions we examined are less than all of the banks and prepaid cards we reviewed if consumers take steps to minimize fees to the fullest extent possible. At Alliant Credit Union, consumers don’t face any fees so long as they avoid out-of-network ATM fees. At Golden 1 Credit Union, consumers paid $16.95 over the course of a year when they take steps to avoid out-of-network ATM fees, which is slightly cheaper than the Western Union or H&R Block cards (at minimum $18).

US Bank is the only bank of the five examined that does not currently charge a monthly fee for its basic checking account (although the bank has announced that it may soon charge a monthly fee). Monthly fees can be waived at the four other banks if consumers meet certain conditions, such as using direct deposit at Wells Fargo or by using debit cards to make five purchases each month at Chase. Customers can avoid ATM fees at all five banks by using only their own banks’ network of ATMs. High-cost overdraft protection fees can be avoided by not signing up for such programs or by choosing a cheaper alternative such as linking a checking account to a savings account.

However with prepaid cards we found that it can be very difficult to identify all of the fees that you can be charged. In a number of cases, the complete fee schedule was difficult to find on company web sites and the information was sometimes confusing. Prepaid card users can take steps to reduce their fees. For example, $4.95 MoneyPak fees for re-loading money onto prepaid cards can be avoided altogether by using direct deposit or lowered slightly to $3.95 using MoneyGram. Prepaid card users can avoid non-network ATM fees by getting cash back when making purchases and by checking balances online or over the phone.

Aside from the fees associated with prepaid cards, consumers need to be aware that they
may be vulnerable to losing their money if their prepaid card is lost or stolen and used by others to make fraudulent transactions. That’s because prepaid card users whose money is held in a pooled account are not protected by the same regulatory and statutory safeguards that enable bank account debit card users to recover their money. Prepaid cards may only have voluntary protections that could be revised or rescinded at any time for any reason.

Please click here to read the full report.

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