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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 deposit accounts Spencer Tierney is a consumer bank writer for NerdWallet. He has written about the personal financial sector since with a focus on certificate of deposit and other banking-related issues. His work has been covered on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is located in Berkeley, California.
Updated Aug 10, 2016
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Visit a convenience store like 7-Eleven or CVS Pharmacy and you're likely to find a few prepaid debit cards hanging on the rack.
These cards, that are used to budget or as checking account replacements are becoming more sought-after. Purchases on cards from the largest prepaid issuers increased 15.7 percent in 2014 with the previous year as per The Nilson Report, which analyzes information from the industry of payment.
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Although they are popular they do face some issues. In the past year, both experienced technical glitches that resulted in cardholders being locked from their account for as long as a week. In that time, all money on these cards, including income that had been directly deposited onto them, was inaccessible. Even in non-shocking circumstances, prepaid debit cards have many drawbacks.
Frequent fees
Prepaid debit cards usually charge you for features that you would normally get when you have a checking account such as free ATM access, customer support as well as mobile and online services. Also, unlike checking accounts prepay cards typically don't have ways to waive their monthly fees.
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Janice Elliot-Howard, an author in Atlanta was the first to get the prepaid card which cost her a small fee each time she purchased something. When she realized the amount it was costing her, she quickly canceled the card and purchased one which doesn't charge charges for transactions at the point of purchase.
The woman isn't able to stay clear of any fees, however.
"The disadvantage is the ATM charge [for cash withdrawals], but I do that very rarely," she says.
One of the benefits of 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 could be charged around $30 or $35 for spending more money than you've got within your accounts. But a prepaid card's frequent charges 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 to another country, only to discover that the card was not able to be used abroad.
"I find that the fine printing is the area where I'm noticing the problems," says Avery, creator of the travel website Solo Trekker 4 U and an investment banker in private equity located in Washington, D.C. She had planned to use the card at ATMs in the international market to get cash and had not found any mention of the card's outside packaging that it was intended for domestic use.
It's not the only data that could be missing.
"The disclosures for prepaid credit 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 project at the Pew Charitable Trusts in Washington, D.C.
Protections still lacking
Credit cards that are pre-paid, like debit and credit cards are part of payment networks such as Visa and MasterCard. This means that you have fraud protections for card purchases but they do not have the protections that you can get from the protections you get with a bank account.
"When it comes to bill pay and ATM transactions, those are not done on the Visa nor MasterCard network," King says.
Other payment providers have similar exclusions. For these transactions, King says you have to rely on a card's disclosures which might not offer protections , unless they are specifically for purchases.
Prepaid debit cards are also not obliged to carry insurance through the Federal Deposit Insurance Corp. Also known as the FDIC, which is how customers are able to recover their funds in the event that their bank or card issuer is insolvent. Although many prepaid issuers offer coverage voluntarily however, their agreements with cardholders might state that their terms are subject to change at any point.
The checking accounts, however, must have more fraud coverage because of a that covers electronic and ATM transactions. They also have to be covered through the FDIC.
The good news for those who have prepaid debit cards may be in the works. According to the Consumer Financial Protection Bureau plans to announce later in the year that would increase protection against fraud on these cards in line with those that cover debit and checking accounts.
"Prepaid debit card users deserve the same protections as debit card users," says Christina Tetreault the legal counsel at the staff of Consumers Union in San Francisco.
About the author: Spencer Tierney is a writer and NerdWallet's official authority for certificates of deposit. The work of Spencer Tierney has been featured by USA Today and the Los Angeles Times.
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