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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

Written 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 particular focus on certificates of deposit, as well as other banking subjects. His work has been highlighted in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. The location of his work is Berkeley, California.

Aug 10, 2016

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Visit one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to see some prepaid debit cards hanging on a rack.

And these payment cards, employed for budgeting and as checking account replacements are becoming more sought-after. Card purchases made by the largest prepaid issuers increased 15.7% in 2014 compared to the previous year as per The Nilson Report, which analyzes information from the industry of payment.

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Despite their widespread use however, prepaid debit cards do have their share of problems. In the last year both experienced technical glitches that resulted in cardholders being shut off their cards for as long as a week. At that point, any money on these cards, including income that had been directly deposited into them, was unavailable. Even in non-shocking events the prepaid debit cards come with numerous disadvantages.

Frequent fee

Prepaid debit cards usually charge fees for features you would normally get with a checking account, for example, free ATM access, customer support as well as mobile and online services. And unlike checking accounts, prepay cards typically don’t have options to eliminate their monthly charges.

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Janice Elliot-Howard, an author from Atlanta initially had an prepaid card that would charge her a small amount each purchase. When she realized how much that was costing, she quickly canceled it and bought a card that doesn’t charge transaction fees for purchases.

It isn’t possible to avoid all fees, though.

“The disadvantage is the ATM surcharge for cash withdrawals], however, I rarely use ATMs,” she says.

One of the benefits of credit cards that are prepaid is the fact they do not allow overdrafts or have overdraft-related fees. With a checking account you could be hit with an of around $30 or $35 for spending more money than you’ve got on your bank account. But the frequent fees 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 to travel overseas but then realized that the card could not be used in foreign countries.

“I notice that the small prints are where I’m seeing the issues,” says Avery, the founder of travel site Solo Trekker 4 U and a private equity investment banker working in Washington, D.C. She was planning to use the card at ATMs in the international market for cash withdrawals and found no mention of the card’s outside packaging that it was meant for use in the United States.

And that’s not the only information that’s missing.

“The disclosures for prepaid cards sold in retail don’t require that all fees 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.

There is still no protection

The debit card you use to pay for purchases, similar to credit and debit cards, belong to payment processors like Visa as well as MasterCard. This means that you have fraud protections for card purchases , but not the greater protections you can get from a bank account.

“When it pertains to bill pay as well as ATM transactions, these cannot be done through those networks, such as the Visa or MasterCard systems,” King says.

Other payment networks have similar exclusions. In these transactions, King says you must trust the disclosures of your card, which may not include protections apart from those on purchases.

Prepaid debit cards do not have to be insured by the Federal Deposit Insurance Corp. Also known as the FDIC as a way customers can recover their money should their bank or issuer is insolvent. Although many prepaid issuers offer coverage voluntarily, their cardholder agreements may state that the conditions can be changed at any point.

Checking accounts, in contrast they must have greater coverage because of a that protects the electronic transactions as well as ATM transactions. Additionally, they must be protected with the FDIC.

Good news for debit card holders with prepaid cards is possible. The Consumer Financial Protection Bureau plans to announce later in the year that will increase protections against fraud on these cards to match those that cover debit and checking accounts.

“Prepaid debit card users deserve the same protections afforded debit card users,” says Christina Tetreault, staff attorney at Consumers Union in San Francisco.

The author’s bio: Spencer Tierney is an expert on certificates of deposit at NerdWallet. The work of Spencer Tierney has been highlighted in USA Today and the Los Angeles Times.

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