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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, ethical banking, banking deposit accounts Spencer Tierney is a consumer banking writer at NerdWallet. He has been writing about the personal financial sector since with a focus on certificate of deposit and other banking-related issues. The work he has written for him was covered in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is based in Berkeley, California.

Aug 10, 2016

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Go to an convenience store such as 7-Eleven or CVS Pharmacy and you’re likely to see some pre-paid debit cards hung on shelves.

They are also that are used to budget or as checking account replacements have become more popular. Card purchases made by the top prepaid issuers grew by 15.7% in 2014 compared to the previous year according to the Nilson Report, which analyzes information from the industry of payment.

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Despite their popularity they do face some issues. In the last year both experienced technical issues that led to cardholders being shut off their cards for as long as seven days. At that point, any funds on these cards, even income that was directly deposited onto the cards, was not available. However, even in the absence of extreme situations they have several downsides.

Frequent fee

Prepaid debit cards usually charge you fees for services that you would normally get in a checking account like free ATM usage, customer service, and online and mobile services. And unlike checking accounts, prepaid cards often don’t offer the option of avoiding monthly fees.

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Janice Elliot-Howardis an author from Atlanta, originally got a prepaid card that charged her a small amount each purchase. When she realized how much the card was costing her she promptly canceled the card and purchased a new one that didn’t have purchase transaction fees.

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 credit cards that are prepaid is the fact that they don’t allow overdrafts or have overdraft-related fees. If you have a checking account you may be charged around $30 or $35 for spending more than what the amount you have available within your accounts. But a prepaid card’s frequent charges for transactions or ATM withdrawals may still add up.

It’s not always easy to find out the details of your card.

Elizabeth Avery bought a prepaid debit card from a pharmacy to travel overseas however, she later discovered that the card couldn’t be used abroad.

“I find that the fine print is where I’m seeing issues,” says Avery, the founder of travel site Solo Trekker 4 U and an investment banker for private equity working in Washington, D.C. She was planning to use the card in ATMs across the world to withdraw cash, but discovered no indication of the card’s outside packaging that it was meant for use in the United States.

And that’s not the only information that can be missing.

“The disclosures for prepaid cards that are sold at retail doesn’t need that all the fees need to be mentioned on the packaging outside,” says Thaddeus King who is part of the consumer banking initiative within the Pew Charitable Trusts in Washington, D.C.

The protections aren’t there yet

The debit card you use to pay for purchases, similar to debit and credit cards are part of payment networks such as Visa or MasterCard. This means that you are protected against fraud for cards, but not the greater protections you get with a bank account.

“When it is about bill pay or ATM transactions, they cannot be done through those networks, such as the Visa nor MasterCard systems,” King says.

Other payment networks have similar exclusions. For these transactions, King says you must rely on a card’s disclosures, which may not include security features that are different from those for purchases.

The debit cards that are prepaid aren’t required for insurance by the Federal Deposit Insurance Corp. Also known as the FDIC, which is how 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 however, their agreements with cardholders might state that their conditions can be changed at any point.

The checking accounts, however, must have more fraud coverage because of a that includes the electronic transactions as well as ATM transactions. They must also be covered with the FDIC.

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

“Prepaid debit card users deserve the same protections as debit card holders,” says Christina Tetreault who is a lawyer at the office of Consumers Union in San Francisco.

About the author: Spencer Tierney is an expert on deposits and certificates at NerdWallet. His work has been highlighted by USA Today and the Los Angeles Times.

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