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Prepaid debit cards are popular But they do have some drawbacks
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Prepaid Debit Cards are Popular However, they have their own drawbacks.
By Spencer Tierney Senior Writer | Certificates of deposit, ethical banking, banking deposits Spencer Tierney is a consumer banker writer at NerdWallet. He has covered personal finance since 2013 with a focus on certificates of deposit as well as other banking-related subjects. His work has been covered in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is based in Berkeley, California.
Aug 10, 2016
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Walk into one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to see some pre-paid debit cards hung on shelves.
These cards, that are used to budget or as checking account substitutes, are getting more popular. Purchases on cards from the largest prepaid issuers increased 15.7 percent in 2014 when compared to the previous year, according to The Nilson Report, which analyzes information from the industry of payment.
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Despite their widespread use they do face many issues. In the last year both the and experienced technical glitches which led to cardholders being locked from their account for as long as seven days. During that time, any funds on these cards, even income that was directly transferred to the cards, was not available. However, even in the absence of extreme events, prepaid debit cards have several downsides.
Frequent fee
Prepaid debit cards tend to charge you fees for services that you are used to with a checking account, for example, free ATM usage, customer service as well as mobile and online services. Also, unlike checking accounts the majority of prepaid cards don’t provide the option of avoiding monthly charges.
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Janice Elliot-Howardis an author from Atlanta was the first to get a prepaid card that charged her a small fee every purchase. When she realized how much the card was costing her the card, she immediately canceled it and purchased a new one that didn’t have purchase transaction fees.
The woman isn’t able to stay clear of all fees, though.
“The disadvantage is the ATM surcharge [for cash withdrawals], however, I don’t do it often,” she says.
One of the benefits of prepaid debit cards is they do not allow overdrafts or charge overdraft fees. With a checking or savings account you may be charged around $30 or $35 if you spend more than the amount the amount you have available within your accounts. But the regular fees for transactions and ATM withdrawals may still increase.
It’s not always easy to find out the details of your card.
Elizabeth Avery bought a prepaid debit card from a pharmacy to travel overseas but then realized that the card couldn’t be used abroad.
“I find that the fine prints are where I’m seeing problems,” says Avery, founder of travel website Solo Trekker 4 U and an investment banker in private equity in Washington, D.C. She was planning to use the card at international ATMs for cash withdrawals and discovered no indication on the packaging’s exterior that it was intended for use in the United States.
It’s not the only data that could be missing.
“The disclosure for prepaid cards that are sold in retail don’t require that all the fees need to be mentioned on the outside of the packaging,” says Thaddeus King who is the head of the consumer banking program within The Pew Charitable Trusts in Washington, D.C.
Protections still lacking
Credit cards that are pre-paid, which are similar to credit and debit cards, belong to payment networks like Visa as well as MasterCard. In the end, you have fraud protections for cards, but they do not have the protections that you get with an account at a bank.
“When it comes to bill pay or ATM transactions, they cannot be done through either the Visa and MasterCard networks,” King says.
Other payment networks offer similar exclusions. For those transactions, King adds, you need to trust the disclosures of your card, which may not include protections apart from those on purchases.
Prepaid debit cards also aren’t required for insurance by the Federal Deposit Insurance Corp. Also known as the FDIC, which is how customers are able to recover their funds if their bank or card issuer is insolvent. While many prepaid issuers provide protection on their own, their cardholder agreements might state that their conditions can be changed at any time.
The checking accounts, however they must have greater coverage because of a that protects electronic and ATM transactions. Additionally, they must be protected with the FDIC.
The good news for debit card holders with prepaid cards could be coming soon. The Consumer Financial Protection Bureau plans to later this year that will extend protection against fraud for the cards to be comparable to those that cover debit cards and checking accounts.
“Prepaid debit card users deserve the same protections as debit card users,” says Christina Tetreault who is a staff attorney at Consumers Union in San Francisco.
About the author: Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. He has had his work highlighted by USA Today and the Los Angeles Times.
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