Prepaid Debit Cards are Popular However, they have their own drawbacks.
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Prepaid debit cards are popular But they do have some drawbacks
Written by Spencer Tierney Senior Writer | Certificates of deposit, ethical banking, banking deposits 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-related subjects. He has had his work highlighted by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is located in Berkeley, California.
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 pre-paid debit cards hung on shelves.
These cards, that are used to budget or as checking account substitutes have become more popular. The number of purchases on cards issued by the largest prepaid issuers increased 15.7 percent in 2014 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 glitches which led to cardholders being shut off their cards for up to one week. During that time, any cash on these cards including earnings that were directly transferred to them, was unavailable. But even outside of drastic situations, prepaid debit cards have several downsides.
Frequent fee
Prepaid debit cards usually charge you fees for services that you would normally get with a checking account, such as free ATM use, customer support, and online and mobile services. In contrast to checking accounts, prepaid cards often don't offer options to eliminate their monthly charges.
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Janice Elliot Howard, a writer living in Atlanta, originally got an prepaid card that would charge her a small cost each purchase. When she realized the amount it was costing her, she quickly canceled it and bought a card that doesn't charge transaction fees for purchases.
It isn't possible to avoid all fees, though.
"The disadvantage is the ATM surcharge [for cash withdrawals], however, I rarely use ATMs," she says.
One of the benefits of debit cards that are prepaid is they do not allow overdrafts, or charge fees for overdrafts. With a checking or savings account you could be charged around $30 or $35 for spending more than the amount the amount you have available on your bank account. However, prepaid cards' frequent charges for transactions or ATM withdrawals could increase.
It's not always easy to find out the details of your card.
Elizabeth Avery bought a prepaid debit card in a drugstore to take her on a trip abroad however, she later discovered that the card could not be used in foreign countries.
"I find that the small print is where I'm seeing issues," says Avery, founder of travel website Solo Trekker 4 U and an investment banker for private equity located in Washington, D.C. She was planning to use the card at international ATMs for cash withdrawals and found no mention of the card's outside packaging that it was intended for domestic use.
And that's not the only data that could be missing.
"The disclosures for prepaid credit cards sold in retail don't require that all the fees need to be mentioned on the outside packaging," says Thaddeus King who is the head of the consumer banking program within The Pew Charitable Trusts in Washington, D.C.
The protections aren't there yet
The debit card you use to pay for purchases, like debit and credit cards, belong to payment processors like Visa as well as MasterCard. As a result, you are protected against fraud for cards, but not the broader protections you get with the bank account.
"When it pertains to bill pay as well as ATM transactions, they cannot be done through those networks, such as the Visa nor MasterCard systems," King says.
Other payment platforms offer similar exclusions. In these transactions, King adds, you need to trust the disclosures of your card that may not provide protections , unless they are specifically for purchases.
Prepaid debit cards do not have to be insured by the Federal Deposit Insurance Corp. Also known as the FDIC this is the way customers are able to recover their funds in the event that their bank or card issuer is insolvent. Although many prepaid issuers offer insurance on a voluntary basis but their cards' agreements with their customers may say that the terms can change at any time.
The checking accounts, however should have greater fraud protection because it protects electronic and ATM transactions. They also have to be protected through the FDIC.
The good news for prepaid debit card holders may be in the works. It is believed that the Consumer Financial Protection Bureau plans to later this year that will extend protection against fraud for these cards to match those that cover debit cards and checking accounts.
"Prepaid debit card users should have the same protections afforded debit card holders," says Christina Tetreault the staff attorney at Consumers Union in San Francisco.
About the author: 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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