Prepaid Debit Cards are Popular but Still Have Downsides
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Prepaid Debit Cards are Popular but Still Have Downsides
Written by Spencer Tierney Senior Writer | Certificates of deposit and ethical banking, as well as banking deposit accounts Spencer Tierney is a consumer banking writer at NerdWallet. He has covered personal finance since 2013, with a focus on certificates of deposit, as well as other banking subjects. He has had his work highlighted on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is located in Berkeley, California.
Aug 10 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 a few prepaid debit cards hanging on the rack.
These cards, used for budgeting or as checking account replacements have become more popular. Purchases on cards from the largest prepaid issuers increased 15.7% in 2014 compared with the previous year according to the Nilson Report, which analyzes information from the industry of payment.
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Although they are popular however, prepaid debit cards do have their share of problems. The last year, both the and experienced technical glitches which led to cardholders getting locked off their cards for up to seven days. During that time, any funds on these cards, including income that had been directly deposited into them, could not be accessed. Even in non-shocking situations they have several downsides.
Frequent fee
Prepaid debit cards usually charge fees for features you take for granted when you have a checking account like free ATM access, customer support, and online and mobile services. In contrast to checking accounts, the majority of prepaid cards don’t provide options to eliminate their monthly charges.
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Janice Elliot-Howard, an author in Atlanta was the first to get the prepaid card which charged her a small fee every when she purchased something. When she realized how much it was costing her she promptly canceled the card and bought one that doesn’t charge transaction fees for purchases.
The woman isn’t able to stay clear of the cost of all fees, but.
“The downside is the ATM charge [for cash withdrawals], however, I don’t do it often,” she says.
One of the benefits of debit cards that are prepaid is that they don’t allow overdrafts, or charge fees for overdrafts. With a checking account you may be charged around $30 or $35 for spending more than what you’ve got on your bank account. But the frequent fees for transactions or ATM withdrawals can still be significant.
Card details aren’t always clear
Elizabeth Avery bought a prepaid debit card at a drugstore for an upcoming trip overseas however, she later discovered that the card couldn’t be used overseas.
“I notice that the fine prints are where I’m seeing the issues,” 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 the card at ATMs in the international market for cash withdrawals and discovered no indication of the card’s outside packaging 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 fees to be mentioned on the outside packaging,” says Thaddeus King who is the head of the consumer banking initiative at The Pew Charitable Trusts in Washington, D.C.
There is still no protection
The debit card you use to pay for purchases, which are similar to debit and credit cards, belong to payment networks like Visa and MasterCard. In the end, you are protected against fraud for card purchases , but not the broader protections you receive with a bank account.
“When it is about bill pay and ATM transactions, those are not done on either the Visa and MasterCard network,” King says.
Other payment providers have similar exclusions. For those transactions, King adds, you must trust the disclosures of your card, which may not include security features that are different from those for purchases.
Prepaid debit cards also aren’t required to have insurance from FDIC. Federal Deposit Insurance Corp., or FDIC this is the way customers can recover their money if their bank or card issuer fails. Although many prepaid issuers offer insurance on a voluntary basis however, their agreements with cardholders may say that the conditions can be changed at any point.
Checking accounts, in contrast they must have greater protection due to a policy that protects electronic and ATM transactions. They must also be protected by the FDIC.
A good thing for prepaid debit card holders may be in the works. According to the Consumer Financial Protection Bureau plans to announce later in the 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 holders deserve the same protections as 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 on certificates of deposit at NerdWallet. The work of Spencer Tierney has been featured by USA Today and the Los Angeles Times.
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