Prepaid Debit Cards Are Popular But they do have some drawbacks
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Prepaid debit cards are popular However, they have their own drawbacks.
Written 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 written about personal finance since 2013 with a particular focus on certificates of deposit and other banking-related issues. The work he has written for him was highlighted in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is located in Berkeley, California.
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 prepaid debit cards hanging on a rack.
These cards, employed for budgeting and as substitutes for checking accounts have become more popular. The number of purchases on cards issued by the largest prepaid issuers increased 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, prepaid debit cards have some issues. In the last year both the and experienced technical glitches which led to cardholders getting locked off their cards for up to a week. At that point, any funds on these cards, even income that was directly transferred to the cards, was not available. But even outside of drastic events they have several downsides.
Frequent charges
Prepaid debit cards usually charge fees for services you would normally get in a checking account for example, free ATM use, customer support, and online and mobile services. And unlike checking accounts, the majority of prepaid cards don’t provide the option of avoiding monthly charges.
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Janice Elliot-Howardis an author living in Atlanta, originally got an prepaid card that would charge her a small cost each time she bought something. After she realized how much the card was costing her she promptly canceled the card and purchased a new one that didn’t charge purchase transaction fees.
The woman isn’t able to stay clear of all fees, though.
“The disadvantage is the ATM surcharge [for cash withdrawals], but I don’t do it often,” she says.
One of the benefits of prepaid debit cards is that they don’t permit overdrafts or charge overdraft fees. With a checking account, you can get charged around $30 or $35 if you spend more than the amount you have in your account. But the frequent charges for transactions or ATM withdrawals may still be significant.
Card details aren’t always clear
Elizabeth Avery bought a prepaid debit card from a pharmacy to take her on a trip abroad but later realized that the card was not able to be used overseas.
“I notice that the small print is where I’m seeing the problems,” says Avery, founder of travel website Solo Trekker 4 U and an investment banker in private equity working in Washington, D.C. She had planned 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 intended to be used in the US.
It’s not the only information that’s missing.
“The disclosure for prepaid credit cards sold in retail don’t require that all fees have to be listed on the packaging outside,” says Thaddeus King, who works for the consumer banking initiative in 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 can get protection against fraud on cards, but not the greater protections you receive with the bank account.
“When it pertains to bill pay or ATM transactions, they are not done on the Visa and MasterCard network,” King says.
Other payment providers offer similar exclusions. For those transactions, King says you must trust the disclosures of your card, which may not include security features that are different from those for purchases.
Prepaid debit cards do not have to have insurance from FDIC. Federal Deposit Insurance Corp., or FDIC as a way customers can recover their money in the event that their bank or card issuer is insolvent. Although many prepaid issuers offer insurance on a voluntary basis but their cards’ agreements with their customers may say that the terms can change at any point.
The checking accounts, however should have greater fraud protection because it covers the electronic transactions as well as ATM transactions. They must also be covered with the FDIC.
Good news for those who have prepaid debit cards could be coming soon. According to the Consumer Financial Protection Bureau plans to later this year that would extend fraud protections for these cards in line with the protections for debit and checking accounts.
“Prepaid debit card holders deserve the same protections as debit card users,” says Christina Tetreault the staff attorney at Consumers Union in San Francisco.
The author’s bio: Spencer Tierney is an expert on deposits and certificates at NerdWallet. He has had his work featured by USA Today and the Los Angeles Times.
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