Some Debit Cards Will Soon Carry Fees

How to avoid paying extra as banks change their policies.

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Wells Fargo just announced that it will test a $3 monthly fee for those who use its debit card. The fee will be levied against customers in Georgia, New Mexico, Nevada and Oregon beginning October 14, 2011. As a result, we can add debit card fees to the long list of bank fees we love to hate. To understand why Wells Fargo is testing a debit card fee, we need look no further than the fine folks in Washington.

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Ronald Reagan once quipped that the “nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.’” Enter the Dodd-Frank financial reform law enacted in 2010. As part of that sweeping reform, Senator Durbin (D-Il) championed a provision that empowered the Federal Reserve to cap the “swipe” fees that merchants pay banks for every debit card transaction. And that’s just what the Fed did this summer, limiting the fee to 21 cents per transaction.

In theory, retailers were expected to pass these savings on to their customers. But as just about everybody under the sun warned when Dodd-Frank was passed, the results are quite different. Instead of helping consumers, most expect banks to eliminate rewards and add fees to make up for the lost revenue. And that’s just what is happening. Chase is already testing a $3 fee on its debit cards and considering limiting purchases to $50. And we can now add Wells Fargo to the list of banks that have added fees to their debit cards.

There are several alternatives to debit cards. These alternatives not only can save consumers from unnecessary fees, but in some cases also offer rewards that debit cards simply cannot match. For example, Dodd-Frank did not limit the fees banks can charge for credit card transactions. As a result, many of today’s best rewards credit cards still come with no annual or monthly fees and pay substantial rewards in the form of points, miles or cash.

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Prepaid cards are another alternative. While some cards charge hefty fees, today there are several free prepaid credit card options depending on how a consumer uses the card. And some prepaid cards, like the Walmart MoneyCard, offer cash rebates on certain purchases.

As a third alternative, many online banks offer debit cards without fees. ING Direct, for example, offers what it calls an Electric Orange checking account. Not only does the account come with a free MasterCard debit card, but ING also offers a $50 bonus on new accounts. And as another example, online banker PerkStreet Financial offers a free cash back debit card that can earn up to 5 percent cash back. These rewards rival some credit card rewards offers.

We are likely to see more debit cards raising fees and eliminating rewards as the impact of the Fed’s cap on swipe fees works its way through the industry. Fortunately, there are still no fee alternatives available to consumers willing to do a little homework.

DR is the founder of the popular personal finance blog, the Dough Roller, and author of 99 Painless Ways to Save Money.