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Prepaid Debit Cards Are Popular But they do have some 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 the personal financial sector since with a focus on certificates of deposit and other banking-related issues. He has had his work featured in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is based in Berkeley, California.
Updated August 10, 2016.
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Visit a convenience store like 7-Eleven or CVS Pharmacy and you're likely to see a few pre-paid debit cards hung on shelves.
They are also that are used to budget or as checking account substitutes are becoming more sought-after. Card purchases made by the largest prepaid issuers increased 15.7% in 2014 compared with the previous year as per The Nilson Report, which analyzes the data of the payment industry.
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Although they are popular, prepaid debit cards have some issues. The last year both experienced technical issues that led to cardholders being shut off their cards for up to one week. In that time, all funds on these cards, even income that was directly transferred to them, was inaccessible. Even in non-shocking events the prepaid debit cards come with many drawbacks.
Frequent fees
Prepaid debit cards usually charge you for features that you are used to with a checking account, such as free ATM usage, customer service as well as mobile and online services. Also, unlike checking accounts prepay cards typically don't have options to eliminate their monthly charges.
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Janice Elliot-Howardis an author from Atlanta was the first to get a prepaid card that cost her a small fee every time she bought something. After she realized how much it was costing her the card, she immediately canceled the card and purchased one which doesn't charge purchase transaction fees.
The woman isn't able to stay clear of the cost of all fees, but.
"The disadvantage is the ATM surcharge [for cash withdrawals], however, I do that very rarely," she says.
One of the benefits of prepaid debit cards is that they don't permit overdrafts, or charge fees for overdrafts. With a checking or savings account, you can get hit with an of around 30 or 35 cents for spending more than the amount you've got in your account. However, prepaid cards' frequent fees for transactions or ATM withdrawals may still add up.
Card details aren't always clear
Elizabeth Avery bought a prepaid debit card in a drugstore for an upcoming trip overseas but later realized that the card could not be used abroad.
"I find that the fine prints are where I'm seeing problems," says Avery, founder of travel website Solo Trekker 4 U and an investment banker for private equity in Washington, D.C. She was planning to use the card in ATMs across the world to get cash and had not found any mention on the packaging's exterior that it was intended to be used in the US.
It's not the only information that can be missing.
"The disclosures for prepaid credit cards sold at retail stores don't demand that all fees to be disclosed on the outside packaging," says Thaddeus King who works with the consumer banking program at the Pew Charitable Trusts in Washington, D.C.
Protections still lacking
Credit cards that are pre-paid, like debit and credit cards belong to payment networks like Visa or MasterCard. In the end, you can get protection against fraud on card purchases but they do not have the protections that you can get from a bank account.
"When it is about bill pay as well as ATM transactions, they cannot be done through either the Visa or MasterCard networks," King says.
Other payment providers offer similar exclusions. For those transactions, King says you need to trust the disclosures of your card, which may not include protections , unless they are specifically for purchases.
Prepaid debit cards also aren't 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 should their bank or issuer is insolvent. While many issuers of prepaid cards offer coverage voluntarily however, their agreements with cardholders may say that the terms are subject to change at any time.
The checking accounts, however should have greater fraud coverage because of a that protects both electronic as well as ATM transactions. They also have to be insured through the FDIC.
A good thing for debit card holders with prepaid cards is possible. The Consumer Financial Protection Bureau plans to release its plans later this year, which would increase protection against fraud on the cards to be comparable to the protections for debit and checking accounts.
"Prepaid debit card users should have the same protections afforded debit card holders," says Christina Tetreault, staff attorney at Consumers Union in San Francisco.
Author bio Spencer Tierney is a writer and NerdWallet's authority on certificates of deposit. He has had his work highlighted by USA Today and the Los Angeles Times.
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