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Prepaid debit cards are popular However, they have their own drawbacks.

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Prepaid debit cards are popular but Still Have Downsides

by Spencer Tierney Senior Writer | Certificates of Deposit, ethical banking, banking deposits Spencer Tierney is a consumer banker writer at NerdWallet. He has written about personal finance since 2013, with a focus on certificate of deposit as well as other banking-related topics. He has had his work covered on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is based in Berkeley, California.

Aug 10 Aug 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 the rack.

They are also employed for budgeting and as checking account replacements are becoming more sought-after. The number of purchases on cards issued by the top prepaid issuers grew by 15.7 percent in 2014 when compared with the previous year, according to The Nilson Report, which analyzes information from the industry of payment.

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Despite their popularity, prepaid debit cards have some issues. In the last year both the and experienced technical glitches that resulted in cardholders being shut off their cards for up to a week. In that time, all cash on these cards even income that was directly transferred to them, could not be accessed. But even outside of drastic circumstances the prepaid debit cards come with numerous disadvantages.

Frequent charges

Prepaid debit cards usually charge you fees for services that you would normally get when you have a checking account for example, free ATM usage, customer service as well as mobile and online services. Also, unlike checking accounts prepaid cards often don’t offer the option of avoiding monthly charges.

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Janice Elliot Howard, a writer in Atlanta initially had the prepaid card which charged her a small amount each purchase. When she realized how much the card was costing her she promptly canceled the card and bought one that doesn’t have purchase transaction fees.

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

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

One of the benefits of credit cards that are prepaid is the fact they do not allow overdrafts or have overdraft-related fees. With a checking account you may be the equivalent of 30 or 35 cents for spending more than what the amount you have available in your account. But the regular fees for transactions and ATM withdrawals may still increase.

The card details may not always be clear

Elizabeth Avery bought a prepaid debit card in a drugstore to travel overseas but later realized that the card couldn’t be used overseas.

“I notice that the small prints are where I’m seeing the issues,” says Avery, the founder of travel site Solo Trekker 4 U and a private equity investment banker working in Washington, D.C. She was planning to use her card at international ATMs to withdraw cash, but found no mention on the outside packaging that it was intended to be used in the US.

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

“The disclosure for prepaid cards sold at retail stores don’t demand that all fees have to be listed on the outside of the packaging,” says Thaddeus King who is part of the consumer banking initiative in the Pew Charitable Trusts in Washington, D.C.

Protections still lacking

Credit cards that are pre-paid, similar to credit and debit cards, belong to payment processors like Visa as well as MasterCard. As a result, you are protected against fraud for card purchases but they do not have the protections that you receive with a bank account.

“When it is about bill pay as well as ATM transactions, these are not processed on those networks, such as the Visa and MasterCard systems,” King says.

Other payment networks have similar exclusions. For those transactions, King adds, you must rely on a card’s disclosures, which may not include security features that are different from those for purchases.

Prepaid debit cards also do not have for insurance by FDIC. Federal Deposit Insurance Corp. Also known as the FDIC as a way customers are able to recover their funds in the event that their bank or card issuer fails. Although many prepaid issuers offer protection on their own however, their agreements with cardholders might state that their terms can change at any point.

Checking accounts, in contrast, must have more fraud protection because it includes the electronic transactions as well as ATM transactions. They must also be protected with the FDIC.

A good thing for those who have prepaid debit cards could be coming soon. It is believed that the Consumer Financial Protection Bureau plans to later this year that would extend fraud protections for these cards in line with those that cover debit and checking accounts.

“Prepaid debit card users should have 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 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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