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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 Still Have Downsides

By Spencer Tierney Senior Writer | Certificates of Deposit and ethical banking, as well as banking deposits Spencer Tierney is a consumer banking writer at NerdWallet. He has covered personal finance since 2013 with a focus on certificates of deposit, as well as other banking subjects. He has had his work featured on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is based in Berkeley, California.

Aug 10 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 shelves.

They are also employed for budgeting and as substitutes for checking accounts have become more popular. The number of purchases on cards issued by the top prepaid issuers grew by 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 widespread use they do face some issues. In the last year both suffered technical glitches that resulted in cardholders being locked out of their accounts for up to seven days. During that time, any money on these cards, even income that was directly transferred to them, was unavailable. But even outside of drastic events they have several downsides.

Frequent fee

Prepaid debit cards usually charge you fees for services that you take for granted when you have a checking account such as free ATM use, customer support, and online and mobile services. And unlike checking accounts, prepay cards typically don’t have options to eliminate their monthly charges.

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Janice Elliot Howard, a writer from Atlanta initially had an prepaid card that would charge her a small amount each when she purchased something. When she realized the amount that was costing, she quickly canceled it and bought one that doesn’t have purchase transaction fees.

She isn’t able to avoid any fees, however.

“The drawback is the ATM surcharge [for cash withdrawals], but I do that very rarely,” she says.

One saving grace for many credit cards that are prepaid is the fact that they don’t allow overdrafts, or charge fees for overdrafts. With a checking account, you can get the equivalent of 30 or 35 cents for spending more than the amount you’ve got in your account. But the frequent charges for transactions or ATM withdrawals can still add up.

Card details aren’t always clear

Elizabeth Avery bought a prepaid debit card at a drugstore for an upcoming trip overseas but later realized that the card could not be used in foreign countries.

“I notice that the small printing is the area where I’m seeing the issues,” says Avery, founder of travel website Solo Trekker 4 U and an investment banker in private equity located in Washington, D.C. She had planned to use the card at international ATMs to get cash and had not found any mention of the card’s outside packaging that it was meant for use in the United States.

But that’s not all the information that’s missing.

“The disclosures for prepaid credit cards sold at retail stores don’t demand that all fees to be disclosed on the outside of the packaging,” says Thaddeus King, who works for the consumer banking project within The Pew Charitable Trusts in Washington, D.C.

Protections still lacking

Prepaid debit cards, similar to debit and credit cards, belong to payment processors like Visa as well as MasterCard. This means that you have fraud protections for card purchases , but they do not have the protections that you receive with a bank account.

“When it comes to bill pay or ATM transactions, these cannot be done through the Visa and MasterCard networks,” King says.

Other payment platforms offer similar exclusions. For these transactions, King adds, you need to depend on the disclosures provided by your card that may not provide security features that are different from those for purchases.

Prepaid debit cards don’t have to be insured by the Federal Deposit Insurance Corp. Also known as the FDIC as a way customers can get their money back in the event that their bank or card issuer fails. While many issuers of prepaid cards offer insurance on a voluntary basis, their cardholder agreements may say that the conditions can be changed at any point.

Checking accounts, on the other hand, must have more fraud protection because it covers both electronic as well as ATM transactions. They also have to be covered through the FDIC.

Good news for prepaid debit card holders may be in the works. It is believed that the Consumer Financial Protection Bureau plans to later this year that would extend fraud protections for the cards to be comparable to those that cover debit cards and checking accounts.

“Prepaid debit card users deserve the same protections as debit card users,” says Christina Tetreault, staff attorney at Consumers Union in San Francisco.

About the author: Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. He has had his work highlighted on USA Today and the Los Angeles Times.

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