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 banking 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. He has had his work covered by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. The location of his work is Berkeley, California.
Aug 10 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 debit cards that are prepaid hanging on the rack.
And these payment cards, employed for budgeting and as substitutes for checking accounts have become more popular. The number of purchases on cards issued by the largest prepaid issuers increased 15.7 percent in 2014 when compared with the previous year, according to The Nilson Report, which analyzes payment industry data.
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Despite their widespread use, prepaid debit cards have many issues. In the past year, both suffered technical issues that led to cardholders being locked out of their accounts for up to a week. During that time, any money on these cards, including income that had been directly transferred to the cards, was not available. However, even in the absence of extreme events, prepaid debit cards have many drawbacks.
Frequent fee
Prepaid debit cards tend to charge fees for features you are used to with a checking account, for example, free ATM use, customer support, and online and mobile services. In contrast to checking accounts, prepay cards typically don’t have the option of avoiding monthly fees.
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Janice Elliot-Howardis an author from Atlanta initially had an prepaid card that would charge her a small fee every time she bought something. When she realized how much the card was costing her she promptly canceled the card and purchased a new one that didn’t charge transaction fees for purchases.
The woman isn’t able to stay clear of all fees, though.
“The drawback is the ATM charge [for cash withdrawals], however, I rarely use ATMs,” she says.
One saving grace for many debit cards that are prepaid is that they don’t permit overdrafts, or charge fees for overdrafts. With a checking account you may be the equivalent of $30 or $35 if you spend more money than the amount you have available on your bank account. But a prepaid card’s frequent fees for transactions or ATM withdrawals may still be significant.
The card details may not always be clear
Elizabeth Avery bought a prepaid debit card at a drugstore to take her on a trip abroad but then realized that the card couldn’t be used in foreign countries.
“I discover that the small prints are where I’m noticing the problems,” 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 in ATMs across the world to withdraw cash, but discovered no indication of the card’s outside packaging that it was intended to be used in the US.
And that’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 listed on the outside of the packaging,” says Thaddeus King who is the head of the consumer banking project in The Pew Charitable Trusts in Washington, D.C.
There is still no protection
Credit cards that are pre-paid, which are similar to debit and credit cards belong to payment networks like Visa and MasterCard. In the end, you have fraud protections for card purchases , but not the broader protections you receive with the bank account.
“When it pertains to bill pay and ATM transactions, those cannot be done through either the Visa and MasterCard systems,” King says.
Other payment platforms have similar exclusions. In these 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 aren’t required for insurance by the Federal Deposit Insurance Corp. Also known as the FDIC this is the way customers can recover their money if their bank or card issuer is unable to meet their requirements. While many prepaid issuers provide coverage voluntarily but their cards’ agreements with their customers may state that the terms are subject to change at any point.
Checking accounts, in contrast, must have more fraud coverage because of a that protects the electronic transactions as well as ATM transactions. They must also be protected by the FDIC.
The good news for prepaid debit card holders could be coming soon. It is believed that the Consumer Financial Protection Bureau plans to announce later in the year that will increase protections against fraud on these cards to match those for debit cards and checking accounts.
“Prepaid debit card users deserve the same protections as debit card holders,” says Christina Tetreault, lawyer at the office of Consumers Union in San Francisco.
The author’s bio: Spencer Tierney is an expert on certificates of deposit at NerdWallet. His work has been highlighted by USA Today and the Los Angeles Times.
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