Prepaid Debit Cards are Popular But they do have some drawbacks

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Prepaid Debit Cards Are Popular But they do have some drawbacks

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

Aug 10 Aug 10, 2016

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Visit a convenience store like 7-Eleven or CVS Pharmacy and you’re likely to see some pre-paid debit cards hung on the rack.

They are also that are used to budget or as checking account substitutes have become more popular. Card purchases made by the top prepaid issuers grew by 15.7 percent in 2014 to the previous year, according to The Nilson Report, which analyzes payment industry data.

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Despite their widespread use they do face some issues. In the past year, both the and experienced technical glitches that resulted in cardholders being shut out of their accounts for up to one week. During that time, any cash on these cards including income that had been directly transferred to them, was unavailable. But even outside of drastic situations, prepaid debit cards have many drawbacks.

Frequent charges

Prepaid debit cards typically charge you fees for services that you take for granted in a checking account like free ATM access, customer support as well as online and mobile services. Also, unlike checking accounts the majority of prepaid cards don’t provide options to eliminate their monthly fees.

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Janice Elliot-Howardis an author living in Atlanta, originally got a prepaid card that charged her a small fee every purchase. After she realized how much that was costing the card, she immediately canceled it and bought one that doesn’t charge transaction fees for purchases.

It isn’t possible to avoid any fees, however.

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

One benefit of many prepaid debit cards is that they don’t allow overdrafts or charge overdraft fees. With a checking or savings account you may be the equivalent of 30 or 35 cents for spending more than what you have on your bank account. But the frequent fees for transactions or ATM withdrawals may still be significant.

The card details may not always be clear

Elizabeth Avery bought a prepaid debit card at a drugstore for an upcoming trip overseas but later realized that the card could not be used abroad.

“I find 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 had planned to use the card in ATMs across the world to get cash and had not found any mention on the packaging’s exterior that it was only for domestic use.

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

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

The protections aren’t there yet

Prepaid debit cards, like credit and debit cards, are part of payment networks such as Visa and MasterCard. This means that you have fraud protections for cards, but they do not have the protections that you can get from an account at a bank.

“When it comes to payment of bills as well as ATM transactions, those cannot be done through those networks, such as the Visa and MasterCard network,” King says.

Other payment providers 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 don’t have to be insured by FDIC. Federal Deposit Insurance Corp. (FDIC). FDIC this is the way customers are able to recover their funds if their bank or card issuer fails. While many issuers of prepaid cards offer coverage voluntarily but their cards’ agreements with their customers might state that their terms can change at any time.

Checking accounts, on the other hand should have greater fraud protection due to a policy that protects both electronic as well as ATM transactions. They also have to be protected through the FDIC.

Good news for debit card holders with prepaid cards is possible. The Consumer Financial Protection Bureau plans to release its plans later this year, which would extend fraud protections for these cards in line with those for checking accounts and debit cards.

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

Author bio Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. He has had his work featured on USA Today and the Los Angeles Times.

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