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Prepaid Debit Cards are Popular but Still Have Downsides
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Prepaid Debit Cards Are Popular But they do have some drawbacks
By Spencer Tierney Senior Writer | Certificates of deposit, ethical banking, banking deposits Spencer Tierney is a consumer banker at NerdWallet. He has covered finances for individuals since the year 2013, with a particular focus on certificates of deposit as well as other banking-related topics. The work he has written for him was highlighted by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. The location of his work is Berkeley, California.
Aug 10 Aug 10, 2016
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Go to one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to find a few prepaid debit cards hanging on a rack.
They are also used for budgeting or as checking account replacements are becoming more sought-after. The number of purchases on cards issued by the biggest prepaid issuers rose 15.7 percent in 2014 to 2013, according to The Nilson Report, which analyzes the data of the payment industry.
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Despite their popularity, prepaid debit cards have their share of problems. The last year, both suffered technical glitches that resulted in cardholders getting locked from their account for as long as seven days. At that point, any money on these cards, including earnings that were directly deposited onto the cards, was not available. Even in non-shocking events the prepaid debit cards come with many drawbacks.
Frequent fee
Prepaid debit cards usually charge fees for features you take for granted with a checking account, for example, free ATM use, customer support, and online and mobile services. And unlike checking accounts, prepaid cards often don’t offer ways to waive their monthly charges.
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Janice Elliot-Howardis an author in Atlanta, originally got an prepaid card that would charge her a small amount each purchase. When she realized how much that was costing the card, she immediately canceled it and bought one that doesn’t charge purchase transaction fees.
The woman isn’t able to stay clear of all fees, though.
“The disadvantage is the ATM charge [for cash withdrawals], but I do that very rarely,” she says.
One benefit of many credit cards that are prepaid is the fact that they don’t permit overdrafts, or charge fees for overdrafts. With a checking account, you can get hit with an of around $30 or $35 for spending more money than you have within your accounts. However, prepaid cards’ regular fees for transactions and ATM withdrawals may still increase.
Card details aren’t always clear
Elizabeth Avery bought a prepaid debit card in a drugstore to take her on a trip abroad but then realized that the card could not be used overseas.
“I notice that the small prints are where I’m seeing the problems,” says Avery, creator of the travel website Solo Trekker 4 U and a private equity investment banker working in Washington, D.C. She was planning to use her card in ATMs across the world to withdraw cash, but discovered no indication on the packaging’s exterior that it was meant for domestic use.
And that’s not the only data that could be missing.
“The disclosures for prepaid cards that are sold at retail stores don’t demand that all fees have to be listed on the packaging outside,” says Thaddeus King, who works for the consumer banking initiative within the Pew Charitable Trusts in Washington, D.C.
Protections still lacking
Credit cards that are pre-paid, like credit and debit cards, are part of payment networks such as Visa or MasterCard. In the end, you are protected against fraud for card purchases but not the greater protections you get with a bank account.
“When it pertains to bill pay or ATM transactions, these are not done on the Visa nor MasterCard systems,” King says.
Other payment platforms offer similar exclusions. For those transactions, King says you need to rely on a card’s disclosures that may not provide protections apart from those on purchases.
Prepaid debit cards also aren’t required to be insured by FDIC. Federal Deposit Insurance Corp. (FDIC). FDIC, which is how customers are able to recover their funds in the event that their bank or card issuer is insolvent. While many issuers of prepaid cards offer coverage voluntarily however, their agreements with cardholders may say that the conditions can be changed at any point.
Checking accounts, on the other hand should have greater fraud coverage because of a that protects the electronic transactions as well as ATM transactions. Additionally, they must be insured by the FDIC.
A good thing for debit card holders with prepaid cards is possible. According to the Consumer Financial Protection Bureau plans to later this year that will extend protection against fraud for these cards to match the protections for checking accounts and debit cards.
“Prepaid debit card users should have the same protections afforded debit card users,” says Christina Tetreault who is a lawyer at the office of Consumers Union in San Francisco.
The author’s bio: Spencer Tierney is an expert on deposits and certificates at NerdWallet. His work has been featured in USA Today and the Los Angeles Times.
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