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Prepaid debit cards are popular But they do have some drawbacks
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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 writer at NerdWallet. He has been writing about personal finance since 2013 with a focus on certificate of deposit as well as other banking-related topics. His work has been covered in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is located in Berkeley, California.
Aug 10, 2016
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Walk into an convenience store such as 7-Eleven or CVS Pharmacy and you’re likely to see some prepaid debit cards hanging on the rack.
They are also that are used to budget or as substitutes for checking accounts, are getting more popular. Card purchases made by the top prepaid issuers grew by 15.7 percent in 2014 to the previous year, according to The Nilson Report, which analyzes the data of the payment industry.
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Although they are popular however, prepaid debit cards do have their share of problems. In the last year both the and experienced technical glitches that resulted in cardholders being shut from their account for as long as one week. During that time, any funds on these cards, including earnings that were directly deposited into the cards, was not available. But even outside of drastic events they have several downsides.
Frequent fee
Prepaid debit cards tend to charge fees for services you take for granted when you have a checking account for example, free ATM access, customer support, and online and mobile services. In contrast to checking accounts, the majority of prepaid cards don’t provide the option of avoiding monthly fees.
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Janice Elliot Howard, a writer living in Atlanta initially had an prepaid card that would charge her a small amount each purchase. After she realized how much it was costing her the card, she immediately canceled it and bought one that doesn’t charge purchase transaction fees.
It isn’t possible to avoid all fees, though.
“The disadvantage is the ATM surcharge [for cash withdrawals], however, I don’t do it often,” she says.
One benefit of many debit cards that are prepaid is that they don’t allow overdrafts, or charge fees for overdrafts. If you have a checking account you may be hit with an of around $30 or $35 if you spend more than the amount you have within your accounts. But the frequent charges for transactions or ATM withdrawals could be significant.
It’s not always easy to find out the details of your card.
Elizabeth Avery bought a prepaid debit card from a pharmacy for an upcoming trip overseas but then realized that the card couldn’t be used overseas.
“I discover that the small prints are where I’m seeing problems,” says Avery, creator of the travel website Solo Trekker 4 U and a private equity investment banker in Washington, D.C. She was planning to use the card in ATMs across the world for cash withdrawals and found no mention of the card’s outside packaging that it was meant for domestic use.
But that’s not all the data that could be missing.
“The disclosures for prepaid cards sold at retail doesn’t need that all fees to be disclosed on the outside packaging,” says Thaddeus King who is part of the consumer banking project within The Pew Charitable Trusts in Washington, D.C.
Protections still lacking
Prepaid debit cards, like debit and credit cards, belong to payment networks like Visa and MasterCard. As a result, you have fraud protections for cards, but they do not have the protections that you get with a bank account.
“When it is about bill pay and ATM transactions, they are not done on the Visa or MasterCard systems,” King says.
Other payment providers offer similar exclusions. For those transactions, King adds, you need to trust the disclosures of your card that might not offer protections apart from those on purchases.
Prepaid debit cards also don’t have for insurance by FDIC. Federal Deposit Insurance Corp., or FDIC this is the way customers can get their money back in the event that their bank or card issuer is insolvent. While many issuers of prepaid cards offer protection on their own, their cardholder agreements might state that their conditions can be changed at any time.
Checking accounts, on the other hand they must have greater protection due to a policy that includes the electronic transactions as well as ATM transactions. They must also be protected by the FDIC.
A good thing for prepaid debit card holders may be in the works. The Consumer Financial Protection Bureau plans to later this year that will extend protection against fraud for these cards to match those that cover checking accounts and debit cards.
“Prepaid debit card users deserve the same protections afforded debit card users,” says Christina Tetreault who is a legal counsel at the staff of Consumers Union in San Francisco.
The author’s bio: Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. He has had his work featured in USA Today and the Los Angeles Times.
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