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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, ethical banking, 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 subjects. The work he has written for him was covered by The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is located in Berkeley, California.

Aug 10 10, 2016

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Visit a convenience store like 7-Eleven or CVS Pharmacy and you’re likely to see a few debit cards that are prepaid hanging on the rack.

And these payment cards, employed for budgeting and as checking account substitutes 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 to 2013 according to the Nilson Report, which analyzes payment industry data.

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Although they are popular however, prepaid debit cards do have many issues. In the past year, both experienced technical glitches which led to cardholders being locked from their account for up to a week. During that time, any money on these cards, including income that had been directly transferred to them, was unavailable. However, even in the absence of extreme events, prepaid debit cards have many drawbacks.

Frequent fee

Prepaid debit cards usually charge you fees for services that you take for granted with a checking account, for example, free ATM usage, customer service, and online and mobile services. And unlike checking accounts, the majority of prepaid cards don’t provide ways to waive their monthly charges.

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Janice Elliot-Howard, an author from Atlanta initially had an prepaid card that would charge her a small amount each time she bought something. After she realized how much that was costing the card, she immediately canceled it and purchased a new one that didn’t charge purchase transaction fees.

The woman isn’t able to stay clear of any fees, however.

« The disadvantage is the ATM charge [for cash withdrawals], however, I rarely use ATMs, » she says.

One saving grace for many credit cards that are prepaid is the fact that they don’t allow overdrafts, or charge fees for overdrafts. If you have a checking account you could be hit with an of around 30 or 35 cents for spending more than what you have on your bank account. However, prepaid cards’ regular fees for transactions and ATM withdrawals could be significant.

Card details aren’t always clear

Elizabeth Avery bought a prepaid debit card from a pharmacy to travel overseas however, she later discovered that the card could not be used overseas.

« I notice that the fine print is where I’m seeing the problems, » says Avery, creator of the travel website Solo Trekker 4 U and a private equity investment banker working in Washington, D.C. She was planning to use her card at ATMs in the international market for cash withdrawals and found no mention on the outside packaging that it was meant to be used in the US.

And that’s not the only data that could be missing.

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

Protections still lacking

The debit card you use to pay for purchases, which are similar to debit and credit cards, belong to payment networks like Visa and MasterCard. In the end, you can get protection against fraud on cards, but they do not have the protections that you can get from a bank account.

« When it pertains to payment of bills as well as ATM transactions, they are not done on those networks, such as the Visa and MasterCard networks, » King says.

Other payment networks offer similar exclusions. For these transactions, King says you need to depend on the disclosures provided by 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, which is how customers are able to recover their funds if their bank or card issuer is unable to meet their requirements. While many prepaid issuers provide coverage voluntarily but their cards’ agreements with their customers might state that their terms are subject to change at any point.

Checking accounts, on the other hand should have greater fraud protection because it protects the electronic transactions as well as ATM transactions. They must also be covered by the FDIC.

A good thing for those who have prepaid debit cards is possible. According to the Consumer Financial Protection Bureau plans to announce later in the year that will extend protection against fraud for these cards in line with the protections for debit cards and checking accounts.

« Prepaid debit card users should have the same protections afforded debit card users, » says Christina Tetreault who is a staff attorney at Consumers Union in San Francisco.

Author bio Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. The work of Spencer Tierney has been highlighted on USA Today and the Los Angeles Times.

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