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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

Written by Spencer Tierney Senior Writer | Certificates of deposit and ethical banking, as well as banking deposit accounts Spencer Tierney is a consumer banker writer at NerdWallet. He has covered finances for individuals since the year 2013, with a focus on certificates of deposit, as well as other banking issues. The work he has written for him was featured by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. The location of his work is Berkeley, California.

Aug 10 10, 2016

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Visit an convenience store such as 7-Eleven or CVS Pharmacy and you’re likely to find a few prepaid debit cards hanging on a rack.

And these payment cards, used for budgeting or as substitutes for checking accounts are becoming more sought-after. Card purchases made by the top prepaid issuers grew by 15.7% in 2014 compared with the previous year according to the Nilson Report, which analyzes the data of the payment industry.

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Although they are popular they do face many issues. The last year, both the and experienced technical glitches that resulted in cardholders being locked off their cards for as long as one week. During that time, any funds on these cards, including earnings that were directly deposited into them, was unavailable. But even outside of drastic circumstances the prepaid debit cards come with many drawbacks.

Frequent charges

Prepaid debit cards tend to charge fees for features you would normally get when you have a checking account such as free ATM use, customer support, and online and mobile services. In contrast to checking accounts, prepay cards typically don’t have the option of avoiding monthly charges.

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Janice Elliot-Howard, an author living in Atlanta, originally got a prepaid card that charged her a small cost each when she purchased something. When she realized how much the card was costing her the card, she immediately canceled it and bought a card that doesn’t charge transaction fees for purchases.

The woman isn’t able to stay clear of the cost of all fees, but.

“The disadvantage is the ATM surcharge [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 permit overdrafts, or charge fees for overdrafts. If you have a checking account you may be charged around $30 or $35 for spending more than the amount you have on your bank account. However, prepaid cards’ regular fees for transactions and ATM withdrawals can still be significant.

Card details aren’t always clear

Elizabeth Avery bought a prepaid debit card in a drugstore to travel overseas however, she later discovered that the card couldn’t be used in foreign countries.

“I discover that the small printing is the area where I’m noticing the problems,” says Avery, creator of the travel website Solo Trekker 4 U and an investment banker for private equity working in Washington, D.C. She was planning to use her card in ATMs across the world for cash withdrawals and found no mention on the outside packaging that it was only for use in the United States.

It’s not the only data that could be missing.

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

There is still no protection

Credit cards that are pre-paid, which are similar to credit and debit cards, belong to payment processors like Visa and MasterCard. In the end, you have fraud protections for card purchases , but not the broader protections you receive with a bank account.

“When it comes to bill pay and ATM transactions, these are not done on either the Visa and MasterCard network,” King says.

Other payment networks have similar exclusions. In these transactions, King says you have to rely on a card’s disclosures, which may not include protections , unless they are specifically for purchases.

Prepaid debit cards do not have for insurance by FDIC. Federal Deposit Insurance Corp. (FDIC). FDIC as a way customers can recover their money should their bank or issuer is unable to meet their requirements. Although many prepaid issuers offer protection on their own however, their agreements with cardholders might state that their conditions can be changed at any time.

Checking accounts, on the other hand, must have more fraud coverage because of a that covers electronic and ATM transactions. They also have to be protected with the FDIC.

A good thing for those who have prepaid debit cards is possible. The Consumer Financial Protection Bureau plans to later this year that will increase protections against fraud on these cards to match those that cover debit cards and checking accounts.

“Prepaid debit card users should have the same protections afforded debit card holders,” says Christina Tetreault, staff attorney at Consumers Union in San Francisco.

Author bio Spencer Tierney is an expert on certificates of deposit at NerdWallet. His work has been featured on USA Today and the Los Angeles Times.

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