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Checking accounts and debit cards have something in common: hidden fees that are meant to catch you off guard. If you are trying to figure out the option that has fewer fees, you will probably find that a checking account is cheaper. There are several reasons why.

The Overdraft Factor

Generally speaking, a normal user will find that prepaid debit cards are more costly than checking accounts. At Nerdwallet.com we’ve conducted a small experiment: comparing the fees for a checking account at the ten largest checking account providers against the fees associated with ten prepaid debit cards, including America’s most popular, the WalMart MoneyCard.

On average, a prepaid debit card will cost you more than $19 per month, while the average checking account will only cost $6. In the appendix, you can find more details on how we got these numbers.

The major variable, though, is if or when a checking account holder decides to use overdraft protection, the mechanism banks use to make money on checking accounts. Usually, the overdraft charges assessed on a checking account-connected debit card are incurred by mistake. These mistakes are expensive though, as overdraft charges can be up to $35 per transaction. This can be especially damaging if you get hit with the fee without realizing your account is empty.

How much can overdraft fees end up costing you? A study conducted by the FDIC reports that Americans who overdraw their accounts more than twenty times a year stood to lose more than $1,600 for doing so.

Ultimately, you would have to overdraft your checking account five times a year in order to spend more on a checking account than with a prepaid debit card.

On average, the overdraft fee assessed by America’s 10 largest checking account providers is $33.75, which can certainly push users past the $229.67 in yearly fees that accrue to a prepaid debit card, when added the $81.80 in fees that are paid on the average checking account without overdrafts. But those with the discipline to avoid overdrafts will be best served by getting a checking account at a bank.

In addition, as of August 2010 the FDIC has prevented banks from opting customers in to overdraft programs without consent. So now you don’t even need to be disciplined to avoid overdrafts – just don’t opt in to them.

Rather than a prepaid card, get a secured credit card and a checking account

The state of your wallet will probably benefit from avoiding prepaid debit cards. Getting a secured credit card in combination with a checking account is the best option, for the following reasons:

A secured card can build your credit, something a prepaid debit card can’t do.

Since you need to pay upfront either way, why not pay for the service that improves your credit as well?

The woes of consumers expressed through internet forums also provide a grave warning about the potential of getting scammed by a prepaid debit card. Prepaid debit cards do not have the same level of protection for fraud, disputes, or travel-related incidents that most credit cards do.

Many secured cards also allow you to move up to a standard card after a period of proven trustworthiness. So, going with a secured credit card now could end up getting you access to more premium rewards credit cards in the future.

All this goes to show that you are probably better off with a checking account connected to a secured credit card than with a prepaid debit card. According to the FDIC, the number one reason why people opt not to open a checking account is that there is “not enough money” to make use of one. Since having a checking account is so much cheaper than a prepaid debit card, perhaps you should consider whether you can afford not to use one.

Appendix

In order to calculate the numbers above, we assumed that prepaid debit card holders would have 1.5 withdrawals from ATMs, eight purchases, two card reloads, and only one balance inquiry each month. Using these values, we evaluated cards from ACE Cash Express (NetSpend), Green Dot, RushCard, Emerald Card, Net Spend Visa, Vision Premier, Western Union MoneyWise, Walmart MoneyCard, AccountNow, and Pay Power.

For the banks in the comparison, we made the assumption that a checking account will start with a $100 balance, and that account holders would use an ATM that is out-of-network once per month. With these values, we looked at checking accounts from Citi, HSBC, PNC, Capital One, Sun Trust, US Bank, Wells Fargo, Chase, Bank of America, and TD Bank.

This post comes from the NerdWallet.com team, personal finance bloggers and experts in helping consumers find the best low APR credit cards.

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