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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 and ethical banking, as well as banking deposits Spencer Tierney is a consumer banker at NerdWallet. He has covered personal finance since 2013 with a focus on certificate of deposit, as well as other banking topics. The work he has written for him was covered on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. 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 a few prepaid debit cards hanging on a rack.
These cards, used for budgeting or as substitutes for checking accounts have become more popular. Card purchases made by the largest prepaid issuers increased 15.7 percent in 2014 to the previous year as per The Nilson Report, which analyzes information from the industry of payment.
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Despite their widespread use, prepaid debit cards have many issues. In the last year both suffered technical glitches which led to cardholders getting locked off their cards for up to a week. At that point, any funds on these cards, including income that had been directly deposited onto them, could not be accessed. But even outside of drastic situations, prepaid debit cards have numerous disadvantages.
Frequent fee
Prepaid debit cards typically charge you fees for services that you would normally get in a checking account like free ATM usage, customer service as well as online and mobile services. In contrast to checking accounts, the majority of prepaid cards don’t provide the option of avoiding monthly fees.
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Janice Elliot-Howardis an author from Atlanta was the first to get the prepaid card which charged her a small fee every time she bought something. When she realized how much that was costing she promptly canceled the card and bought a card that doesn’t have purchase transaction fees.
She isn’t able to avoid all fees, though.
«The disadvantage is the ATM charge [for cash withdrawals], however, 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. With a checking or savings account, you can get the equivalent of $30 or $35 for spending more than the amount you have on your bank account. However, prepaid cards’ frequent charges for transactions or ATM withdrawals could 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 however, she later discovered that the card was not able to be used overseas.
«I notice that the small prints are where I’m seeing problems,» says Avery, creator of the travel website Solo Trekker 4 U and a private equity investment banker located in Washington, D.C. She was planning to use the card at international ATMs to withdraw cash, but discovered no indication on the outside packaging that it was intended to be used in the US.
But that’s not all the information that’s missing.
«The disclosure for prepaid cards that are sold at retail doesn’t need that all the fees need to be mentioned on the packaging outside,» says Thaddeus King who is part of the consumer banking program within The Pew Charitable Trusts in Washington, D.C.
Protections still lacking
The debit card you use to pay for purchases, like debit and credit cards, belong to payment processors like Visa as well as MasterCard. In the end, you are protected against fraud for card purchases but not the greater protections you can get from the bank account.
«When it pertains to payment of bills and ATM transactions, these cannot be done through the Visa and MasterCard systems,» King says.
Other payment networks have similar exclusions. In these transactions, King says you have to trust the disclosures of your card that may not provide protections , unless they are specifically for purchases.
Prepaid debit cards aren’t required to be insured by FDIC. Federal Deposit Insurance Corp. (FDIC). FDIC this is the way customers can recover their money if their bank or card issuer fails. While many prepaid issuers provide insurance on a voluntary basis, their cardholder agreements might state that their terms are subject to change at any point.
The checking accounts, however they must have greater coverage because of a that includes electronic and ATM transactions. They must also be protected by the FDIC.
The good news for prepaid debit card holders may be in the works. According to 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 that cover checking accounts and debit cards.
«Prepaid debit card holders deserve the same protections afforded debit card users,» says Christina Tetreault the lawyer at the office of Consumers Union in San Francisco.
Author bio Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. His work has been highlighted by USA Today and the Los Angeles Times.
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