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.

by Spencer Tierney Senior Writer | Certificates of deposit, ethical banking, banking deposit accounts Spencer Tierney is a consumer banker at NerdWallet. He has covered personal finance since 2013 with a focus on certificates of deposit and other banking-related topics. His work has been highlighted by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is based in Berkeley, California.

Aug 10 10, 2016

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

They are also that are used to budget or 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 to 2013, according to The Nilson Report, which analyzes the data of the payment industry.

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Despite their popularity however, prepaid debit cards do have some issues. In the last year both experienced technical glitches that resulted in cardholders being shut from their account for up to one week. During that time, any cash on these cards including earnings that were directly transferred to the cards, was not available. However, even in the absence of extreme circumstances the prepaid debit cards come with several downsides.

Frequent fees

Prepaid debit cards typically charge fees for services you would normally get with a checking account, such as free ATM usage, customer service, and online and mobile services. In contrast to checking accounts, prepay cards typically don’t have ways to waive their monthly charges.

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Janice Elliot-Howard, an author in Atlanta, originally got an prepaid card that would charge her a small amount each time she bought something. When she realized how much the card was costing her the card, she immediately canceled it and purchased a new one that didn’t have purchase transaction fees.

She isn’t able to avoid the cost of all fees, but.

“The disadvantage is the ATM surcharge [for cash withdrawals], but I don’t do it often,” she says.

One saving grace for many debit cards that are prepaid is they do not allow overdrafts or have overdraft-related fees. If you have a checking account, you can get hit with an of around 30 or 35 cents for spending more than the amount you’ve got in your account. But the frequent charges for transactions or ATM withdrawals can still add up.

The card details may not always be clear

Elizabeth Avery bought a prepaid debit card at a drugstore to travel overseas however, she later discovered that the card was not able to be used in foreign countries.

“I discover that the fine prints are where I’m seeing issues,” says Avery, founder of travel website Solo Trekker 4 U and an investment banker in private equity in Washington, D.C. She was planning to use the card at international ATMs to get cash and had found no mention of the card’s outside packaging that it was only for use in the United States.

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

“The disclosures for prepaid credit cards sold at retail doesn’t need that all fees have to be listed on the outside packaging,” says Thaddeus King who is the head of the consumer banking initiative within 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 networks like Visa as well as MasterCard. In the end, you can get protection against fraud on card purchases but they do not have the protections that you can get from a bank account.

“When it comes to bill pay as well as ATM transactions, these cannot be done through either the Visa and MasterCard systems,” King says.

Other payment networks have similar exclusions. In these transactions, King adds, you have to rely on a card’s disclosures that might not offer protections , unless they are specifically for purchases.

Prepaid debit cards don’t have for insurance by the Federal Deposit Insurance Corp. Also known as the FDIC this is the way customers are able to recover their funds should their bank or issuer is unable to meet their requirements. While many issuers of prepaid cards offer coverage voluntarily, their cardholder agreements might state that their conditions can be changed at any time.

Checking accounts, in contrast they must have greater protection because it protects the electronic transactions as well as ATM transactions. They must also be insured with the FDIC.

A good thing for prepaid debit card holders could be coming soon. The Consumer Financial Protection Bureau plans to announce later in the year that will increase protections against fraud on the cards to be comparable to the protections for debit cards and checking accounts.

“Prepaid debit card holders deserve the same protections afforded debit card users,” says Christina Tetreault the legal counsel at the staff of Consumers Union in San Francisco.

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

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