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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

Written by Spencer Tierney Senior Writer | Certificates of deposit ethics, ethical banking, bank deposits Spencer Tierney is a consumer banker writer at NerdWallet. He has covered personal finance since 2013, with a focus on certificates of deposit and other banking-related subjects. The work he has written for him was highlighted on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. The location of his work is Berkeley, California.

Aug 10 Aug 10, 2016

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Visit an convenience store such as 7-Eleven or CVS Pharmacy and you’re likely to see some prepaid debit cards hanging on the rack.

They are also employed for budgeting and as checking account replacements have become more popular. 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 payment industry data.

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Despite their popularity they do face some issues. In the last year both experienced technical glitches which led to cardholders being locked out of their accounts for up to a week. In that time, all money on these cards, even income that was directly deposited into them, was unavailable. But even outside of drastic circumstances they have several downsides.

Frequent charges

Prepaid debit cards typically charge you fees for services that you are used to in a checking account like free ATM access, customer support as well as online and mobile services. In contrast to checking accounts, prepaid cards often don’t offer ways to waive their monthly charges.

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Janice Elliot Howard, a writer in Atlanta initially had an prepaid card that would charge her a small amount each when she purchased something. When she realized the amount it was costing her the card, she immediately canceled it and purchased a new one that didn’t charge transaction fees for purchases.

The woman isn’t able to stay clear of the cost of all fees, but.

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

One of the benefits of credit cards that are prepaid is the fact that they don’t permit overdrafts, or charge fees for overdrafts. With a checking account you could be the equivalent of 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 may still add up.

It’s not always easy to find out the details of your card.

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

“I find that the fine print is where I’m seeing problems,” says Avery, founder of travel website Solo Trekker 4 U and an investment banker in private equity working in Washington, D.C. She was planning to use her card in ATMs across the world for cash withdrawals and found no mention on the packaging’s exterior that it was intended for domestic use.

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

“The disclosure for prepaid cards sold at retail doesn’t need that all fees to be disclosed on the outside of the packaging,” says Thaddeus King, who works for the consumer banking project within The Pew Charitable Trusts in Washington, D.C.

The protections aren’t there yet

Credit cards that are pre-paid, which are similar to debit and credit cards are part of payment networks such as Visa and MasterCard. As a result, you can get protection against fraud on card purchases but not the greater protections you can get from an account at a bank.

“When it pertains to payment of bills as well as ATM transactions, they cannot be done through either the Visa or MasterCard systems,” King says.

Other payment platforms have similar exclusions. In these transactions, King says you have to rely on a card’s disclosures that may not provide protections , unless they are specifically for purchases.

Prepaid debit cards also don’t have for insurance by the Federal Deposit Insurance Corp. (FDIC). FDIC, which is how customers can get their money back in the event that their bank or card issuer is insolvent. While many issuers of prepaid cards offer insurance on a voluntary basis, their cardholder agreements may say that the terms are subject to change at any point.

The checking accounts, however they must have greater protection due to a policy that includes both electronic as well as ATM transactions. They also have to be covered by the FDIC.

A good thing for those who have prepaid debit cards is possible. The Consumer Financial Protection Bureau plans to announce later in the year that would extend fraud protections for these cards to match those that cover debit and checking accounts.

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

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

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