Prepaid Debit Cards Are Popular but Still Have Downsides
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Prepaid Debit Cards Are Popular But they do have some drawbacks
Written by Spencer Tierney Senior Writer | Certificates of deposit ethics, ethical banking, bank deposit accounts Spencer Tierney is a consumer banker writer at NerdWallet. He has written about personal finance since 2013, with a particular focus on certificates of deposit, as well as other banking issues. His work has been featured in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. The location of his work is Berkeley, California.
Aug 10 Aug 10, 2016
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Go to a convenience store like 7-Eleven or CVS Pharmacy and you're likely to see some debit cards that are prepaid hanging on a rack.
They are also employed for budgeting and as checking account substitutes have become more popular. Purchases on cards from the biggest prepaid issuers rose 15.7 percent in 2014 when compared to 2013, according to The Nilson Report, which analyzes information from the industry of payment.
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Despite their widespread use they do face their share of problems. In the past year, both experienced technical glitches which led to cardholders getting locked off their cards for as long as seven days. During that time, any funds on these cards, including earnings that were directly deposited into them, could not be accessed. However, even in the absence of extreme events the prepaid debit cards come with numerous disadvantages.
Frequent fee
Prepaid debit cards usually charge you fees for services that you take for granted when you have a checking account like free ATM use, customer support as well as online and mobile services. And unlike checking accounts, prepay cards typically don't have options to eliminate their monthly fees.
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Janice Elliot-Howard, an author in Atlanta was the first to get an prepaid card that would charge her a small fee every when she purchased something. After she realized how much it was costing her, she quickly canceled it and purchased a new one that didn't have purchase transaction fees.
The woman isn't able to stay clear of any fees, however.
"The drawback is the ATM surcharge for cash withdrawals], however, I rarely use ATMs," she says.
One saving grace for many credit cards that are prepaid is the fact that they don't allow overdrafts, or charge fees for overdrafts. If you have a checking account you could be hit with an of around $30 or $35 if you spend more money than you have within your accounts. But a prepaid card's frequent fees for transactions or ATM withdrawals can still add up.
Card details aren't always clear
Elizabeth Avery bought a prepaid debit card from a pharmacy for an upcoming trip overseas however, she later discovered that the card couldn't be used in foreign countries.
"I notice that the small prints are where I'm seeing the issues," says Avery, the founder of travel site 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 on the outside packaging that it was only for domestic use.
But that's not all the information that's missing.
"The disclosure for prepaid credit cards sold in retail don't require that all the fees need 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
Prepaid debit cards, like credit and debit cards, belong to payment processors like Visa and MasterCard. As a result, you can get protection against fraud on cards, but not the broader protections you can get from an account at a bank.
"When it is about payment of bills and ATM transactions, these cannot be done through either the Visa nor MasterCard network," King says.
Other payment platforms have similar exclusions. For these transactions, King adds, you must rely on a card's disclosures, which may not include protections apart from those on purchases.
The debit cards that are prepaid do not have to have insurance from FDIC. Federal Deposit Insurance Corp., or FDIC this is the way customers can recover their money should their bank or issuer is unable to meet their requirements. Although many prepaid issuers offer insurance on a voluntary basis but their cards' agreements with their customers may state that the terms can change at any time.
The checking accounts, however should have greater fraud coverage because of a that covers both electronic as well as ATM transactions. They must also be covered by the FDIC.
A good thing for those who have prepaid debit cards is possible. It is believed that the Consumer Financial Protection Bureau plans to later this year that would extend fraud protections for the cards to be comparable to those for debit 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.
Author bio Spencer Tierney is an expert on certificates of deposit at NerdWallet. The work of Spencer Tierney has been featured on USA Today and the Los Angeles Times.
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