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.
Written by Spencer Tierney Senior Writer | Certificates of deposit, ethical banking, banking deposit accounts Spencer Tierney is a consumer banker at NerdWallet. He has written about personal finance since 2013 with a focus on certificate of deposit, as well as other banking subjects. The work he has written for him was 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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Visit one of the convenience stores like 7-Eleven or CVS Pharmacy and you're likely to see a few debit cards that are prepaid hanging on the rack.
And these payment cards, used for budgeting or as checking account replacements are becoming more sought-after. The number of purchases on cards issued by the top prepaid issuers grew by 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 their share of problems. In the past year, both suffered technical issues that led to cardholders getting locked off their cards for as long as a week. In that time, all money on these cards, even income that was directly deposited onto the cards, was not available. However, even in the absence of extreme circumstances, prepaid debit cards have numerous disadvantages.
Frequent charges
Prepaid debit cards typically charge fees for features you would normally get in a checking account like free ATM access, customer support as well as online and mobile services. And unlike checking accounts, the majority of prepaid cards don't provide ways to waive their monthly fees.
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Janice Elliot Howard, a writer from Atlanta, originally got a prepaid card that charged her a small fee every purchase. When she realized how much the card was costing her, she quickly canceled it and purchased a new one that didn't have purchase transaction fees.
It isn't possible to avoid all fees, though.
"The drawback is the ATM surcharge [for cash withdrawals], however, I rarely use ATMs," she says.
One of the benefits of prepaid debit cards is that they don't allow overdrafts, or charge fees for overdrafts. With a checking account, you can get the equivalent of $30 or $35 for spending more money than you have on your bank account. But a prepaid card's frequent fees for transactions or ATM withdrawals can still be significant.
The card details may not always be clear
Elizabeth Avery bought a prepaid debit card from a pharmacy to travel overseas but then realized that the card was not able to be used abroad.
"I discover that the fine print is where I'm noticing the problems," says Avery, the founder of travel site Solo Trekker 4 U and an investment banker for private equity working in Washington, D.C. She was planning to use the card at ATMs in the international market to get cash and had discovered no indication of the card's outside packaging that it was meant for use in the United States.
It's not the only data that could be missing.
"The disclosures for prepaid cards that are sold at retail stores don't demand that all fees have to be disclosed on the outside packaging," says Thaddeus King who is the head of the consumer banking project within The Pew Charitable Trusts in Washington, D.C.
Protections still lacking
The debit card you use to pay for purchases, which are similar to debit and credit cards belong to payment processors like Visa as well as MasterCard. This means that you have fraud protections for cards, but they do not have the protections that you receive with the bank account.
"When it comes to payment of bills and ATM transactions, these are not done on those networks, such as the Visa or MasterCard systems," King says.
Other payment providers have similar exclusions. In these transactions, King says you have to trust the disclosures of your card, which may not include protections , unless they are specifically for purchases.
Prepaid debit cards do not have for insurance by FDIC. Federal Deposit Insurance Corp. Also known as the FDIC as a way customers are able to recover their funds should their bank or issuer is insolvent. While many prepaid issuers provide protection on their own, their cardholder agreements might state that their terms can change at any point.
The checking accounts, however they must have greater protection due to a policy that includes both electronic as well as ATM transactions. Additionally, they must be covered with the FDIC.
A good thing for those who have prepaid debit cards could be coming soon. According to the Consumer Financial Protection Bureau plans to later this year that will extend protection against fraud for these cards in line with the protections for debit and checking accounts.
"Prepaid debit card holders deserve the same protections afforded debit card holders," says Christina Tetreault the legal counsel at the staff of Consumers Union in San Francisco.
About the author: 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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