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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
Written by Spencer Tierney Senior Writer | Certificates of Deposit and ethical banking, as well as banking deposit accounts Spencer Tierney is a consumer banking writer at NerdWallet. He has been writing about personal finance since 2013 with a focus on certificates of deposit and other banking-related subjects. The work he has written for him was 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 find some pre-paid debit cards hung on the rack.
These cards, that are used to budget or as checking account substitutes have become more popular. Purchases on cards from the largest prepaid issuers increased 15.7% in 2014 compared to the previous year according to the Nilson Report, which analyzes payment industry data.
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Despite their popularity they do face many issues. In the last year both suffered technical issues that led to cardholders being locked from their account for as long as seven days. During that time, any money on these cards, even income that was directly transferred onto them was inaccessible. Even in non-shocking situations they have many drawbacks.
Frequent fees
Prepaid debit cards tend to charge fees for features you are used to with a checking account, like free ATM usage, customer service and online and mobile services. In contrast to checking accounts, prepaid cards often don't offer the option of avoiding monthly fees.
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Janice Elliot Howard, a writer in Atlanta initially had a prepaid card that cost her a small fee each time she purchased something. After she realized how much the card was costing her, she quickly canceled the card and purchased one which doesn't charge transaction charges.
It isn't possible to avoid any fees, however.
"The disadvantage is the ATM charge [for cash withdrawals], but I don't do it often," she says.
One benefit of many debit cards that are prepaid is that they don't permit overdrafts, or charge fees for overdrafts. With a checking account you could be the equivalent of $30 or $35 if you spend more money than you have within your accounts. But the frequent charges for transactions or ATM withdrawals could add up.
It's not always easy to find out the details of your card.
Elizabeth Avery bought a prepaid debit card at a drugstore for an upcoming trip overseas but later realized that the card couldn't 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 had planned to use her card at ATMs in the international market to withdraw cash, but found no mention on the packaging's exterior that it was only to be used in the US.
But that's not all the information that can be missing.
"The disclosures for prepaid credit cards sold at retail stores don't demand that all the fees need to be mentioned on the packaging outside," says Thaddeus King who is the head of the consumer banking initiative within The Pew Charitable Trusts in Washington, D.C.
The protections aren't there yet
Credit cards that are pre-paid, similar to debit and credit cards are associated with payment networks such as Visa or MasterCard. This means that you are protected against fraud for card purchases , but not the broader protections you can get from a bank account.
"When it is about bill pay or ATM transactions, those are not processed on either the Visa and MasterCard network," King says.
Other payment platforms offer similar exclusions. For these transactions, King says you must trust the disclosures of your card that may not provide protections , unless they are specifically for purchases.
Prepaid debit cards are also not legally required to have insurance from the Federal Deposit Insurance Corp., or FDIC, which is how customers can recover their money should their bank or issuer is insolvent. While many issuers of prepaid cards offer protection on their own but their cards' agreements with their customers might stipulate that their conditions are subject to change at any point.
The checking accounts, however they must have more coverage because of a that protects electronic and ATM transactions. They must also be insured by the FDIC.
A good thing for those who have prepaid debit cards could be coming soon. According to 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 those for checking accounts and debit cards.
"Prepaid debit card users deserve 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 a writer and NerdWallet's official authority on certificates of deposit. The work of Spencer Tierney has been featured by USA Today and the Los Angeles Times.
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