Prepaid Debit Cards Are Popular However, they have their own drawbacks.
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Prepaid Debit Cards are Popular However, they have their own drawbacks.
By Spencer Tierney Senior Writer | Certificates of deposit and ethical banking, as well as banking deposit accounts Spencer Tierney is a consumer banker at NerdWallet. He has written about the personal financial sector since with a focus on certificate of deposit and other banking-related subjects. His work has been featured by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is located in Berkeley, California.
Aug 10, 2016
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Visit one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to find a few prepaid debit cards hanging on a rack.
They are also employed for budgeting and as checking account substitutes, are getting more popular. The number of purchases on cards issued by the top prepaid issuers grew by 15.7 percent in 2014 to the previous year, according to The Nilson Report, which analyzes the data of the payment industry.
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Despite their popularity they do face their share of problems. In the past year, both the and experienced technical glitches that resulted in cardholders getting locked off their cards for up to a week. At that point, any funds on these cards, including income that had been directly transferred to them, was unavailable. But even outside of drastic situations the prepaid debit cards come with numerous disadvantages.
Frequent fees
Prepaid debit cards typically charge fees for services you are used to with a checking account, like free ATM use, customer support, and online and mobile services. In contrast to checking accounts, prepaid cards often don’t offer ways to waive their monthly charges.
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Janice Elliot-Howardis an author from Atlanta was the first to get a prepaid card that charged her a small fee every time she bought something. When she realized the amount the card was costing her the card, she immediately canceled it and bought one that doesn’t charge transaction fees for purchases.
She isn’t able to avoid 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 debit cards that are prepaid is they do not allow overdrafts or charge overdraft fees. If you have a checking account, you can get hit with an of around $30 or $35 for spending more than the amount you have in your account. But the frequent charges for transactions or ATM withdrawals could be significant.
Card details aren’t always clear
Elizabeth Avery bought a prepaid debit card at a drugstore to take her on a trip abroad but then realized that the card could not be used in foreign countries.
“I discover that the fine print is where I’m seeing the issues,” says Avery, founder of travel website Solo Trekker 4 U and a private equity investment banker located in Washington, D.C. She was planning to use the card at ATMs in the international market to get cash and had found no mention on the outside packaging that it was only for domestic use.
And that’s not the only information that can be missing.
“The disclosures for prepaid cards that are sold in retail don’t require that all fees to be disclosed on the outside packaging,” says Thaddeus King who is part of the consumer banking project at the Pew Charitable Trusts in Washington, D.C.
There is still no protection
The debit card you use to pay for purchases, which are similar to debit and credit cards belong to payment processors like Visa or MasterCard. In the end, you can get protection against fraud on cards, but not the broader protections you can get from an account at a bank.
“When it is about payment of bills or ATM transactions, these cannot be done through either the Visa nor MasterCard networks,” King says.
Other payment platforms have similar exclusions. For those transactions, King adds, you must depend on the disclosures provided by your card, which may not include protections apart from those on purchases.
The debit cards that are prepaid don’t have to be insured by FDIC. Federal Deposit Insurance Corp. (FDIC). FDIC, which is how customers can get their money back if their bank or card issuer is unable to meet their requirements. While many prepaid issuers provide protection on their own however, their agreements with cardholders may say that the terms are subject to change at any time.
Checking accounts, in contrast, must have more fraud protection because it covers both electronic as well as ATM transactions. They also have to be protected with the FDIC.
Good news for debit card holders with prepaid cards may be in the works. According to the Consumer Financial Protection Bureau plans to release its plans later this year, which will increase protections against fraud on these cards to match those that cover debit and checking accounts.
“Prepaid debit card users should have the same protections as debit card holders,” says Christina Tetreault, legal counsel at the staff of Consumers Union in San Francisco.
About the author: Spencer Tierney is an expert on deposits and certificates at NerdWallet. The work of Spencer Tierney has been featured on USA Today and the Los Angeles Times.
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