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Are pre-paid cards a good alternative to checking accounts to avoid rising fees?

September 21, 2015

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: My bank just raised the fee on my checking account - again. I'm now paying $20 a month. That's more than $200 a year, and I struggle to keep that much in my account to begin with, so this could wipe me out. A co-worker said he just has his paycheck deposited into a pre-paid credit card and uses that instead of a checking account. Is that a good alternative?

A: One thing is for sure - you should find an alternative to paying $20 a month for a checking account. Whether or not a pre-paid card is the right alternative is another matter.

Before you settle on a pre-paid card as an alternative to your current account, there are some important questions you should ask:

1. Am I paying for unwanted features on this checking account?

Recent data from the MoneyRates.com Checking Account Fee Survey show the average fee for checking accounts is $13.09, so $20 is about 50 percent above average. Accounts charging fees at that level usually come with special features such as relatively high interest (which does not mean much these days) or rewards. The problem is, since you say you typically carry a low balance, you probably won't reap much benefit from checking account interest or rewards - certainly not enough to justify paying $20 a month. As a first step, see if your bank has an account with fewer features but lower fees.

2. Are there cheaper checking accounts out there?

If your bank does not offer a cheaper account, there are banks that do provide free checking accounts. About a quarter of all checking accounts still have no monthly fee, so look for one of those. Online checking accounts are an especially good place to look for free checking.

3. Would the pre-paid card you are considering offer FDIC deposit insurance?

Some pre-paid cards may be set up in association with a bank so that money you put on the card is covered by deposit insurance, but don't assume this is so. Check to make sure because this is too valuable a protection to give up.

4. What fees are associated with this pre-paid card?

A pre-paid card may not have a monthly fee, but one of the knocks on them in general is that they are expensive to use, so find out what fees would be involved. These can include fees for loading and re-loading the card, transactions fees and even non-activity fees.

5. Do you write many checks from your current checking account?

A pre-paid card may be a viable alternative to a debit card, but if you also write checks, you will need to find an alternative.

6. Do you have automatic bill pay set up from your current account?

This is another convenience checking accounts offer that you may not be able to replicate with a pre-paid card.

Rising fees have allowed pre-paid cards to gain a growing following among consumers, but with a little searching, you should be able to get the advantages of a free or reduced fee checking account to avoid paying anything like your current $20 a month.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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