Prepaid Debit Cards are Popular But they do have some drawbacks

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Prepaid Debit Cards Are Popular but Still Have Downsides

by Spencer Tierney Senior Writer | Certificates of Deposit and ethical banking, as well as banking deposit accounts Spencer Tierney is a consumer banker at NerdWallet. He has written about 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 highlighted 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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Visit one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to find a few prepaid debit cards hanging on shelves.

These cards, that are used to budget or as checking account substitutes have become more popular. The number of purchases on cards issued by the largest prepaid issuers increased 15.7 percent in 2014 to the previous year, according to The Nilson Report, which analyzes the data of the payment industry.

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Although they are popular, prepaid debit cards have many issues. In the last year both experienced technical issues that led to cardholders being shut off their cards for up to a week. In that time, all money on these cards, including income that had been directly transferred to the cards, was not available. However, even in the absence of extreme situations the prepaid debit cards come with numerous disadvantages.

Frequent fee

Prepaid debit cards typically charge fees for features you are used to with a checking account, for example, free ATM access, customer support, and online and mobile services. Also, unlike checking accounts prepaid cards often don’t offer the option of avoiding monthly charges.

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Janice Elliot-Howard, 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 the card was costing her the card, she immediately canceled it and bought one that doesn’t have purchase transaction fees.

She isn’t able to avoid all fees, though.

“The drawback is the ATM surcharge [for cash withdrawals], but I do that very rarely,” she says.

One saving grace for many credit cards that are prepaid is the fact that they don’t permit overdrafts or have overdraft-related fees. If you have a checking account you could be charged around 30 or 35 cents for spending more than the amount you have within your accounts. But a prepaid card’s regular fees for transactions and ATM withdrawals could increase.

The card details may not always be clear

Elizabeth Avery bought a prepaid debit card from a pharmacy to take her on a trip abroad but then realized that the card could not be used abroad.

“I find that the fine prints are where I’m seeing problems,” says Avery, founder of travel website Solo Trekker 4 U and an investment banker for private equity working in Washington, D.C. She had planned to use the card at ATMs in the international market for cash withdrawals and found no mention on the outside packaging that it was only for domestic use.

But that’s not all the data that could be missing.

“The disclosure for prepaid cards that are 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 project in The Pew Charitable Trusts in Washington, D.C.

There is still no protection

The debit card you use to pay for purchases, similar to debit and credit cards, belong to payment networks like Visa or MasterCard. In the end, you have fraud protections for card purchases , but not the broader protections you can get from the bank account.

“When it is about bill pay and ATM transactions, these cannot be done through either the Visa or MasterCard network,” King says.

Other payment networks offer similar exclusions. For these transactions, King says you have to trust the disclosures of your card, which may not include protections apart from those on purchases.

Prepaid debit cards also don’t have to be insured by the Federal Deposit Insurance Corp., or FDIC as a way customers can get their money back if their bank or card issuer is unable to meet their requirements. Although many prepaid issuers offer protection on their own however, their agreements with cardholders may state that the conditions can be changed at any time.

The checking accounts, however, must have more fraud coverage because of a that protects the electronic transactions as well as ATM transactions. They must also be insured with the FDIC.

A good thing for those who have prepaid debit cards is possible. According to the Consumer Financial Protection Bureau plans to release its plans later this year, which would extend fraud protections for these cards to match those that cover debit cards and checking accounts.

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

The author’s bio: Spencer Tierney is an expert on deposits and certificates at NerdWallet. The work of Spencer Tierney has been highlighted by USA Today and the Los Angeles Times.

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