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Prepaid debit cards are popular but Still Have Downsides

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Prepaid debit cards are popular but Still Have Downsides

by Spencer Tierney Senior Writer | Certificates of deposit ethics, ethical banking, bank deposits Spencer Tierney is a consumer banker writer at NerdWallet. He has covered personal finance since 2013 with a particular focus on certificates of deposit, as well as other banking topics. He has had his work covered on 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 Aug 10, 2016

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Walk into one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to find a few debit cards that are prepaid hanging on shelves.

And these payment cards, employed for budgeting and as checking account replacements, are getting more popular. The number of purchases on cards issued by the top prepaid issuers grew by 15.7 percent in 2014 when compared to the previous year according to the Nilson Report, which analyzes information from the industry of payment.

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Although they are popular they do face many issues. In the past year, both experienced technical issues that led to cardholders being locked off their cards for up to a week. In that time, all money on these cards, even income that was directly transferred to the cards, was not available. But even outside of drastic situations, prepaid debit cards have several downsides.

Frequent fees

Prepaid debit cards typically charge fees for services you take for granted in a checking account like free ATM access, customer support, and online and mobile services. Also, unlike checking accounts the majority of prepaid cards don’t provide the option of avoiding monthly charges.

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Janice Elliot Howard, a writer living in Atlanta initially had an prepaid card that would charge her a small fee every when she purchased something. After she realized how much that was costing 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 the cost of all fees, but.

“The drawback 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 they do not allow overdrafts, or charge fees for overdrafts. With a checking account you could be the equivalent of $30 or $35 for spending more than what you have within your accounts. But the regular fees for transactions and ATM withdrawals can still add up.

Card details aren’t always clear

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

“I find that the small prints are where I’m seeing the problems,” says Avery, creator of the travel website Solo Trekker 4 U and an investment banker in private equity working in Washington, D.C. She was planning to use her card at ATMs in the international market to get cash and had discovered no indication of the card’s outside packaging that it was meant for domestic use.

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

“The disclosures for prepaid credit cards sold at retail stores don’t demand that all fees to be listed on the outside packaging,” says Thaddeus King who is the head of 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, like debit and credit cards, belong to payment networks like Visa or MasterCard. This means that you have fraud protections for card purchases but they do not have the protections that you can get from the bank account.

“When it comes to bill pay and ATM transactions, those are not done on those networks, such as the Visa or MasterCard networks,” King says.

Other payment platforms have similar exclusions. In these transactions, King says you must trust the disclosures of your card that may not provide protections apart from those on purchases.

The debit cards that are prepaid aren’t required to be insured by FDIC. Federal Deposit Insurance Corp., or FDIC this is the way customers can recover their money in the event that their bank or card issuer fails. 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, on the other hand should have greater fraud coverage because of a that includes both electronic as well as ATM transactions. They must also be protected by the FDIC.

A good thing for prepaid debit card holders is possible. The Consumer Financial Protection Bureau plans to later this year that would extend fraud protections for the cards to be comparable to the protections for debit and checking accounts.

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

The author’s bio: Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. The work of Spencer Tierney has been featured in USA Today and the Los Angeles Times.

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