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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
By Spencer Tierney Senior Writer | Certificates of deposit and ethical banking, as well as banking deposits Spencer Tierney is a consumer banker at NerdWallet. He has covered finances for individuals since the year 2013 with a focus on certificates of deposit and other banking-related issues. He has had his work featured by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. The location of his work is Berkeley, California.
Updated August 10, 2016.
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Walk into an convenience store such as 7-Eleven or CVS Pharmacy and you're likely to find a few pre-paid debit cards hung on a rack.
And these payment cards, employed for budgeting and as substitutes for checking accounts 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 popularity however, prepaid debit cards do have their share of problems. The last year both experienced technical glitches that resulted in cardholders being shut from their account for up to a week. At that point, any funds on these cards, including income that had been directly transferred onto them was inaccessible. However, even in the absence of extreme circumstances, prepaid debit cards have several downsides.
Frequent fees
Prepaid debit cards usually charge fees for features you would normally get in a checking account like free ATM use, customer support, and online and mobile services. In contrast to checking accounts, the majority of prepaid cards don't provide ways to waive their monthly charges.
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Janice Elliot-Howard, an author from Atlanta, originally got a prepaid card that cost her a small fee every time she bought something. After she realized how much it was costing her, she quickly canceled it and bought one that doesn't have transaction charges.
It isn't possible to avoid the cost of all fees, but.
"The downside is the ATM charge [for cash withdrawals], but I don't do it often," she says.
One saving grace for many credit cards that are prepaid is the fact that they do not allow overdrafts, or charge fees for overdrafts. With a checking account you could be charged around $30 or $35 if you spend more than the amount you have within your accounts. But a prepaid card's frequent fees for transactions or ATM withdrawals can still increase.
Card details aren't always clear
Elizabeth Avery bought a prepaid debit card in a drugstore to travel overseas but later realized that the card was not able to be used in foreign countries.
"I find that the small prints are where I'm noticing the problems," says Avery, creator of the travel website 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 withdraw cash, but found no mention of the card's outside packaging that it was only for domestic use.
And that's not the only information that's missing.
"The disclosures for prepaid cards that are sold in retail don't require that all the fees need to be mentioned on the packaging outside," says Thaddeus King who is the head of the consumer banking project in 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 are part of payment networks such as Visa as well as MasterCard. As a result, you can get protection against fraud on card purchases , but not the greater protections you receive with the protections you get with a bank account.
"When it comes to payment of bills as well as ATM transactions, they cannot be done through those networks, such as the Visa and MasterCard network," King says.
Other payment networks offer similar exclusions. In these transactions, King says you have to depend on the disclosures provided by your card, which may not include security features that are different from those for purchases.
Prepaid debit cards are also not legally required to have insurance from FDIC. Federal Deposit Insurance Corp. Also known as the FDIC, which is how customers can get their money back in the event that their bank or card issuer is insolvent. Although many prepaid issuers offer insurance on a voluntary basis however, their agreements with cardholders might stipulate that their conditions can be changed at any time.
Checking accounts, in contrast should have greater fraud protection because it includes the electronic transactions as well as ATM transactions. They must also be insured by the FDIC.
The good news for those who have prepaid debit cards may be in the works. The Consumer Financial Protection Bureau plans to release its plans later this year, which would increase protection against fraud on these cards in line with those that cover debit and checking accounts.
"Prepaid debit card holders deserve the same protections afforded debit card users," says Christina Tetreault who is a legal counsel at the staff of Consumers Union in San Francisco.
The author's bio: Spencer Tierney is a writer, and NerdWallet's expert on deposit certificates. His work has been featured by USA Today and the Los Angeles Times.
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