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Prepaid Debit Cards are Popular but Still Have Downsides
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Prepaid Debit Cards Are Popular However, they have their own drawbacks.
By Spencer Tierney Senior Writer | Certificates of Deposit ethics, ethical banking, bank 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 issues. He has had his work highlighted 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 10, 2016
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Visit an convenience store such as 7-Eleven or CVS Pharmacy and you’re likely to see a few pre-paid debit cards hung on shelves.
And these payment cards, employed for budgeting and as checking account replacements are becoming more sought-after. Purchases on cards from the top prepaid issuers grew by 15.7 percent in 2014 when compared with the previous year as per The Nilson Report, which analyzes payment industry data.
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Despite their widespread use however, prepaid debit cards do have some issues. In the last year both the and experienced technical glitches which led to cardholders being shut off their cards for up to seven days. During that time, any funds on these cards, including income that had been directly deposited onto them, was unavailable. However, even in the absence of extreme events the prepaid debit cards come with numerous disadvantages.
Frequent charges
Prepaid debit cards usually charge you fees for services that you are used to when you have a checking account such as free ATM access, customer support as well as online and mobile services. In contrast to checking accounts, prepay cards typically don’t have ways to waive their monthly charges.
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Janice Elliot Howard, a writer living in Atlanta, originally got an prepaid card that would charge her a small cost each when she purchased something. When she realized the amount that was costing the card, she immediately canceled it and bought a card that doesn’t charge purchase transaction fees.
She isn’t able to avoid any fees, however.
“The drawback is the ATM surcharge [for cash withdrawals], however, I don’t do it often,” she says.
One saving grace for many prepaid debit cards is that they don’t allow overdrafts, or charge fees for overdrafts. With a checking account you may be the equivalent of $30 or $35 for spending more money than you have in your account. But a prepaid card’s regular fees for transactions and ATM withdrawals may still add up.
It’s not always easy to find out the details of your card.
Elizabeth Avery bought a prepaid debit card in a drugstore to travel overseas but later realized that the card couldn’t be used abroad.
“I notice that the small print is where I’m noticing 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 had planned to use the card at ATMs in the international market for cash withdrawals and found no mention on the outside packaging that it was only for use in the United States.
And that’s not the only information that can be missing.
“The disclosures for prepaid credit cards sold at retail stores don’t demand that all fees to be listed on the outside packaging,” says Thaddeus King, who works for the consumer banking initiative in the Pew Charitable Trusts in Washington, D.C.
Protections still lacking
Prepaid debit cards, similar to credit and debit cards, are part of payment networks such as Visa or MasterCard. As a result, you can get protection against fraud on card purchases , but not the broader protections you receive with a bank account.
“When it is about payment of bills as well as ATM transactions, they cannot be done through those networks, such as the Visa and MasterCard networks,” King says.
Other payment providers offer similar exclusions. For those transactions, King adds, you must depend on the disclosures provided by your card, which may not include protections apart from those on purchases.
Prepaid debit cards also do not have for insurance by the Federal Deposit Insurance Corp., or FDIC, which is how customers can get their money back in the event that their bank or card issuer is unable to meet their requirements. Although many prepaid issuers offer protection on their own, their cardholder agreements might state that their terms are subject to change at any point.
Checking accounts, in contrast should have greater fraud coverage because of a that covers both electronic as well as ATM transactions. Additionally, they must be protected with the FDIC.
Good news for debit card holders with prepaid cards may be in the works. According to the Consumer Financial Protection Bureau plans to announce later in the year that will increase protections against fraud on the cards to be comparable to those for debit cards and checking accounts.
“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 in the field of certificates of deposit at NerdWallet. His work has been highlighted in USA Today and the Los Angeles Times.
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