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 written about personal finance since 2013, with a particular focus on certificates of deposit as well as other banking-related issues. The work he has written for him was covered on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is located in Berkeley, California.
Aug 10 Aug 10, 2016
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Go to one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to see a few debit cards that are prepaid hanging on a rack.
These cards, used for budgeting or as checking account substitutes are becoming more sought-after. Card purchases made by the biggest prepaid issuers rose 15.7 percent in 2014 to the previous year, according to The Nilson Report, which analyzes payment industry data.
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Despite their popularity, prepaid debit cards have their share of problems. In the past year, both suffered technical issues that led to cardholders getting locked from their account for up to a week. At that point, any cash on these cards including earnings that were directly deposited into them, could not be accessed. But even outside of drastic events, prepaid debit cards have many drawbacks.
Frequent charges
Prepaid debit cards typically charge fees for features you are used to in a checking account for example, free ATM use, customer support as well as online and mobile services. And unlike checking accounts, the majority of prepaid cards don’t provide options to eliminate their monthly charges.
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Janice Elliot-Howardis an author living in Atlanta was the first to get an prepaid card that would charge her a small cost each purchase. When she realized the amount it was costing her, she quickly canceled it and bought a card that doesn’t charge 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], but I rarely use ATMs,” she says.
One benefit of many debit cards that are prepaid is that they don’t allow overdrafts or have overdraft-related fees. With a checking or savings account you may be the equivalent of 30 or 35 cents for spending more than what you’ve got within your accounts. But a prepaid card’s frequent charges for transactions or ATM withdrawals could add up.
The card details may not always be clear
Elizabeth Avery bought a prepaid debit card from a pharmacy for an upcoming trip overseas but then realized that the card couldn’t be used abroad.
“I find that the fine printing is the area where I’m seeing problems,” says Avery, the founder of travel site Solo Trekker 4 U and an investment banker in private equity working in Washington, D.C. She had planned to use the card at international ATMs to withdraw cash, but discovered no indication on the outside packaging that it was only for domestic use.
But that’s not all the information that can be missing.
“The disclosures for prepaid cards that are sold at retail stores don’t demand that all the fees need to be mentioned on the outside packaging,” says Thaddeus King who is part of the consumer banking project at The Pew Charitable Trusts in Washington, D.C.
The protections aren’t there yet
Credit cards that are pre-paid, similar to credit and debit cards, are part of payment networks such as Visa as well as MasterCard. This means that you are protected against fraud for cards, but not the broader protections you can get from the bank account.
“When it pertains to bill pay as well as ATM transactions, these are not processed on either the Visa nor MasterCard network,” King says.
Other payment platforms have similar exclusions. In these transactions, King adds, you need to rely on a card’s disclosures that might not offer security features that are different from those for purchases.
The debit cards that are prepaid do not have to be insured by the Federal Deposit Insurance Corp., or FDIC, which is how customers are able to recover their funds if their bank or card issuer fails. While many prepaid issuers provide coverage voluntarily but their cards’ agreements with their customers may state that the terms can change at any time.
Checking accounts, in contrast should have greater fraud coverage because of a that includes electronic and ATM transactions. They also have to be protected by the FDIC.
The good news for debit card holders with prepaid cards may be in the works. According to the Consumer Financial Protection Bureau plans to announce later in the year that will increase protections against fraud on these cards in line with those that cover checking accounts and debit cards.
“Prepaid debit card users should have the same protections afforded debit card users,” says Christina Tetreault who is a legal counsel at the staff of Consumers Union in San Francisco.
Author bio Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. The work of Spencer Tierney has been highlighted in USA Today and the Los Angeles Times.
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