Prepaid Debit Cards Are Popular but Still Have Downsides
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Prepaid Debit Cards Are Popular but Still Have Downsides
by Spencer Tierney Senior Writer | Certificates of deposit ethics, ethical banking, bank deposit accounts Spencer Tierney is a consumer banker at NerdWallet. He has covered personal finance since 2013, with a focus on certificate of deposit and other banking-related issues. The work he has written for him was featured 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 Aug 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 pre-paid debit cards hung on a rack.
And these payment cards, used for budgeting or as checking account replacements are becoming more sought-after. 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 the data of the payment industry.
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Despite their popularity they do face many issues. In the past year, both suffered technical glitches that resulted in cardholders being shut off their cards for up to one week. During that time, any cash on these cards even income that was directly deposited into the cards, was not available. However, even in the absence of extreme circumstances they have several downsides.
Frequent charges
Prepaid debit cards typically charge you fees for services that you would normally get when you have a checking account like free ATM usage, customer service, and online and mobile services. Also, unlike checking accounts prepay cards typically don’t have the option of avoiding monthly charges.
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Janice Elliot-Howardis an author in Atlanta, originally got an prepaid card that would charge her a small cost each when she purchased something. When she realized how much it was costing her the card, she immediately canceled it and bought one that doesn’t have purchase transaction fees.
The woman isn’t able to stay clear of the cost of all fees, but.
“The downside is the ATM surcharge for cash withdrawals], but I do that very rarely,” she says.
One saving grace for many credit cards that are prepaid is the fact that they don’t permit overdrafts or charge overdraft fees. With a checking or savings account, you can get charged around $30 or $35 for spending more money than you’ve got on your bank account. However, prepaid cards’ regular fees for transactions and ATM withdrawals can still be significant.
Card details aren’t always clear
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 find that the fine print is where I’m seeing the problems,” says Avery, founder of travel website Solo Trekker 4 U and an investment banker in private equity in Washington, D.C. She was planning to use her card at ATMs in the international market for cash withdrawals and found no mention of the card’s outside packaging that it was intended for use in the United States.
It’s not the only information that can be missing.
“The disclosures for prepaid cards sold in retail don’t require that all fees to be listed on the outside of the packaging,” says Thaddeus King who is the head of the consumer banking initiative within the Pew Charitable Trusts in Washington, D.C.
There is still no protection
Prepaid debit cards, which are similar to debit and credit cards belong to payment networks like Visa as well as MasterCard. In the end, you have fraud protections for card purchases , but not the greater protections you can get from an account at a bank.
“When it is about payment of bills or ATM transactions, they are not done on the Visa and MasterCard systems,” King says.
Other payment providers have similar exclusions. For those transactions, King says you need to trust the disclosures of your card that might not offer security features that are different from those for purchases.
Prepaid debit cards don’t have to have insurance from FDIC. Federal Deposit Insurance Corp. (FDIC). FDIC as a way customers can recover their money in the event that their bank or card issuer fails. While many prepaid issuers provide protection on their own but their cards’ agreements with their customers might state that their terms are subject to change at any point.
Checking accounts, in contrast should have greater fraud protection due to a policy that includes electronic and ATM transactions. They must also be insured by the FDIC.
Good news for those who have prepaid debit cards could be coming soon. According to the Consumer Financial Protection Bureau plans to release its plans later this year, which would extend fraud protections for these cards in line with those for checking accounts and debit cards.
“Prepaid debit card users should have 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. He has had his work featured by USA Today and the Los Angeles Times.
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