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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
Written by Spencer Tierney Senior Writer | Certificates of deposit ethics, ethical banking, bank deposits Spencer Tierney is a consumer banker at NerdWallet. He has been writing about the personal financial sector since with a particular focus on certificates of deposit and other banking-related subjects. He has had his work covered on 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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Walk into a convenience store like 7-Eleven or CVS Pharmacy and you're likely to find a few pre-paid debit cards hung on a rack.
These cards, employed for budgeting and as substitutes for checking accounts have become more popular. The number of purchases on cards issued by the biggest prepaid issuers rose 15.7% in 2014 compared with the previous year as per The Nilson Report, which analyzes information from the industry of payment.
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Despite their widespread use they do face many issues. In the last year both experienced technical glitches that resulted in cardholders being locked off their cards for as long as one week. In that time, all cash on these cards including earnings that were directly transferred onto them was unavailable. Even in non-shocking situations the prepaid debit cards come with numerous disadvantages.
Frequent charges
Prepaid debit cards typically charge you fees for services that you would normally get with a checking account, such as free ATM use, 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 living in Atlanta was the first to get the prepaid card which cost her a small fee each time she purchased something. When she realized how much that was costing, she quickly canceled it and bought a new one which doesn't charge transaction charges.
The woman isn't able to stay clear of any fees, however.
"The downside is the ATM charge [for cash withdrawals], however, I don't do it often," she says.
One saving grace for many debit cards that are prepaid is that they don't allow overdrafts, or charge fees for overdrafts. If you have a checking account, you can get charged around 30 or 35 cents for spending more than the amount you've got in your account. But the regular fees for transactions and 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 in a drugstore to travel overseas but later realized that the card couldn't be used in foreign countries.
"I find that the small printing is the area where I'm seeing problems," says Avery, creator of the travel website Solo Trekker 4 U and an investment banker in private equity in Washington, D.C. She had planned to use her card at international ATMs for cash withdrawals and discovered no indication on the packaging's exterior that it was intended for use in the United States.
But that's not all the information that's missing.
"The disclosure for prepaid credit cards sold in retail don't require that all the fees need to be mentioned on the packaging outside," says Thaddeus King who works with the consumer banking program within The Pew Charitable Trusts in Washington, D.C.
Protections still lacking
The debit card you use to pay for purchases, which are similar to debit and credit cards belong to payment networks like Visa or MasterCard. In the end, you have fraud protections for card purchases but not the broader protections you receive with an account in a bank account.
"When it comes to bill pay as well as ATM transactions, they cannot be done through the Visa nor MasterCard systems," King says.
Other payment providers have similar exclusions. In these transactions, King says you need to rely on a card's disclosures which might not offer protections , unless they are specifically for purchases.
The debit cards that are prepaid are also not legally required to have insurance from the Federal Deposit Insurance Corp. (FDIC). FDIC, which is how customers can recover their money if their bank or card issuer fails. Although many prepaid issuers offer protection on their own but their cards' agreements with their customers might state that their terms are subject to change at any time.
The checking accounts, however they must have more protection due to a policy that covers electronic and ATM transactions. They must also be covered by the FDIC.
Good news for prepaid debit card holders could be coming soon. The Consumer Financial Protection Bureau plans to announce later in the year that would extend fraud protections for these cards to match those that cover checking accounts and debit cards.
"Prepaid debit card holders deserve the same protections as debit card holders," says Christina Tetreault the staff attorney at Consumers Union in San Francisco.
Author bio Spencer Tierney is a writer and NerdWallet's authority on deposit certificates. His work has been featured in USA Today and the Los Angeles Times.
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