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Acid Test: Prepaid Debit Card vs. Big Bank

Debit card can offer lower cost, prevent steep overdraft fees

By Sara Huffman
ConsumerAffairs.com

September 15, 2009

For a ConsumerAffairs.com experiment, I decided to try a prepaid Mastercard for a couple weeks and compare its fees and ease of use with my bank.

After looking through my options, I selected a Silver Prepaid Mastercard, which promises free unlimited purchase transactions anywhere credit cards and debit cards are accepted, and most importantly, no overdraft fees. Because I'm not borrowing money, but putting my own money onto the card, it doesn't matter what my credit score is and I was approved immediately.

Like just about any bank product, there are some fees. The general knock on these prepaid cards is the number, and amount, of fees. While that's generally true, some have lower, and fewer fees than their competitors. After doing some homework, I settled on the card from Silver.

The first fee was $9.95 fee to open the account. After checking around, I decided it was worth it because it was similar to others, and it was a one-time charge.

Step-by-step directions

Within a week, they sent me my card and after a quick authorization call, I chose my PIN number which I could use to make debit purchases. On the back of the card, they gave me the URL to their website (www.silvercardmc.com) where I created a profile and could check my account details online. Again, after a few minutes, I was all set up with my username and password.

Through the online website, there are step-by-step directions on how to transfer money from a PayPal account onto the card. If you don't have a PayPal account, there are instructions on how to set up direct deposit of paychecks or transferring money via Western Union, but PayPal is the least expensive way to do it.

I transferred $250 onto the card and within three days, the money was available to use. The cost of the transfer -- a fee of 95 cents.

Over the next couple of weeks, I used my Silver Mastercard like any other credit card. I used it to make an online purchase, I used it at the post office and I used it at the grocery store. I quickly learned to choose "credit" instead of "debit" when I made a purchase at a store. A "credit" purchase with my Silver card is free. A debit transaction costs 95 cents. So over a typical month, I could probably save $10 to $20 in fees by always selecting "credit" when paying for an item.

There was also an unexpected bonus my Big Bank doesn't offer. Two minutes after each purchase I got an email from Silver Card telling me I had made a purchase, how much the purchase was for, and best of all, how much money was left in my account. What a great feature!

A few kinks

There were a few purchases that eventually worked out fine, but weren't quite as seamless as the others:

• At Target, I swiped my card without choosing "credit" first. As a result, it rang up as a debit charge and I got a 95 cents fee.

• At the gas station, I filled up my tank for $35.00. The gas station held onto $50.00 for a few days until the charge cleared. I'm not sure why that happened.

• I paid one of my bills using the Bill Pay feature on Silver Mastercard's website. It took about three days for the payment to clear and my bill to be paid. I wish I had known that -- while the payment went through before the due date, it came dangerously close. I would have paid the bill earlier. Silver Mastercard charged me 95 cents to use Bill Pay.

• At the ATM, I took $20.00 out. The ATM charged me a $3.00 fee and then Silver Mastercard charged me $1.95 for using the ATM. I now realize that when I need cash, I can always get cash back on a purchase from the grocery store. In that case I would select "debit" instead of "credit" but would only have to pay the 95 cents debit fee, instead of almost $5 at the ATM.

No overdrafts

With about $5.00 left on my card, I decided to see what would happen if I tried to use the card on a large purchase that would overdraw my account. At my Big Bank, the charge would go through, but then I would get dinged with a $35 overdraft fee. So, at the grocery store, I swiped the card for a $40 purchase. As promised, the card was declined, instead of going through and causing me to be in the red. Within minutes, I got an email, telling me that I didn't have enough money in my account for that purchase.

Silver -- as well as almost all of the prepaid debit cards -- advertise that they have "no overdraft fees." And while that's technically true, there is a fee involved when you exceed the money in your account. Only, they don't call it an overdraft fee, but rather a "decline fee." It seems a little misleading, but when I checked the "terms of service," the "decline fee" was among the list of fees.

But the decline fee was a lot less than my bank's overdraft fee. When I got home, I checked my account online and found that the fee was $2.95. That's it.

I thought about all those times I would go out and make six or seven debit purchases through my bank, only to come home, check my account online, and see that I was in the red and was getting charged six or seven overdraft fees of $35.00 EACH. A one-time fee of $3 is nothing in comparison.

In the couple of weeks I used the card to spend $250, I paid $10.75 (not counting the charge to open the account) in fees. If I had used it to pay more bills online, that total would have been higher.

The card will work best if you can have your paycheck direct deposited into your account. It not only saves time, its an easy way to keep funds in your account.

I haven't decided whether I will keep using my prepaid debit card now that the experiment is over, but I have to say there are two features that I really like: the $2.95 decline fee instead of a $35 overdraft fee and the email updates to alert me to the charges I've made and my current balance.

While there is almost no truly free banking, using a prepaid credit card is an alternative to going with the Big Banks. It isn't for everyone, but if you get hit with multiple overdraft charges every month or so, you might find it's just as simple and much, much cheaper.

A word of caution: Don't just accept whatever debit card plan your Big Bank happens to offer. Many banks pile on debit card fees that are just as expensive as the checking-account fees we've all learned to hate. Shop around and read the terms and conditions carefully.

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