Prepaid Cards: Another Way to Pay, But Understand the Downsides
Many can be used anywhere, but consider any fees, limitations
It's hard to visit a retail store today without finding a sales
display for products broadly known as stored value cards or, more
commonly, prepaid cards. These cards, which generally allow consumers
to spend only the money deposited onto them, have evolved in recent
years from gift cards sold by individual retailers to multi-purpose,
"reloadable" cards (money can be added, sometimes through direct
deposit) that can be used to pay for purchases and access cash at ATMs
around the world.
Most prepaid cards are branded with the logo of one of the major
card companies (such as American Express, Discover, MasterCard or Visa)
and can generally be used at any merchant or ATM that accepts those
cards. But unlike a credit card, a prepaid card generally will not
allow you to build a credit history because no money is being borrowed.
Also, some prepaid cards can only be used at one store or service
provider.
Some prepaid cards come with a set value, while others require you
to load money after obtaining the card. Other cards are used only to
receive government benefits (such as the Direct Express® debit card for
Social Security payments) or wages deposited by employers (payroll
cards).
Prepaid cards are also marketed as alternatives to traveler's
checks, especially for international travel, and as a way for parents
to give an allowance to their children. They also are being promoted to
consumers who are unwilling or unable to open a bank account.
While prepaid cards have potential benefits, they also come with
potential costs and limitations. "Consumers should not look at prepaid
cards as permanent substitutes for bank accounts," said Luke W.
Reynolds, Chief of the FDIC's Community Outreach Section. "People who
are able to open a traditional bank account and manage it properly can
pay less in fees, earn interest, write checks to merchants who don't
accept plastic, more easily save for future expenses, and perhaps
benefit from more federal protections than with certain pre-paid cards.
Ultimately, you need to be fully informed and shop around to get the
best deal."
How can a consumer wisely choose or use a prepaid card?
Look into the fees, which can add up if you're not careful.
Read all the information that comes with the card so that you
understand which fees are mandatory and which ones you can avoid.
Possible fees include those to activate (start using) the card, add
money onto the card, make purchases, withdraw cash, inquire about your
balance at an ATM (that's in addition to any fee charged by the company
that operates the ATM you use), receive a statement in the mail or
speak with a customer service representative. But some card issuers
also will waive certain fees – for example, if you regularly receive
funds by direct deposit onto the card.
Also look carefully for any differences in transaction fees if you
choose to sign for a purchase (by pushing "credit" at the card reader)
instead of entering your personal identification number or PIN (as a
"debit" transaction).
Some cards may also assess a fee if you try to spend more money than
is on the card. "Don't assume there can't be overdraft fees with a
prepaid card," said Reynolds. "Just as you would with a checking
account, track your balance, perhaps with a check register, to avoid
the risk of overdraft fees."
Under a new federal law, effective August 22, 2010, inactivity fees
on prepaid cards can be imposed only when a transaction has not
occurred for at least 12 months. Also, prepaid cards cannot expire for
at least five years after the card was issued or money was last loaded
onto the card.
Understand your consumer protections, which may vary depending on the card you use.
For example, payroll cards are subject to federal disclosure
requirements and a limitation on your liability for errors or
unauthorized transactions. But some prepaid cards may not provide the
full range of federal protections afforded to other cards, including
debit cards associated with your bank account (see Debit vs. Credit Cards: How They Stack Up).
Be aware, though, that Congress has directed the Federal Reserve Board
to consider new rules clarifying the consumer protections for the
different types of prepaid cards. In addition, cards branded as part of
a network may come with their own protections against errors or fraud.
For details, review the materials you receive with the card to
understand any steps you must take to receive the card issuer's
protections.
The FDIC also has announced that if an employer, government agency
or other organization places money with an insured institution to hold
for peoples' use with prepaid cards, and the bank holding the money
fails, the funds will be considered deposits of the cardholders (as
opposed to deposits of the organization) if the cardholder is named in
the bank's records or certain other documentation. Deposits at failed
banks are insured up to the federal limit. For more information, see
our article in the Spring 2009 issue of
FDIC Consumer News at www.fdic.gov/consumers/consumer/news/cnspr09/prepaid_cards.html or call the FDIC at 1-877-ASK-FDIC (1-877-275-3342).
Take additional precautions to protect yourself from fraud or theft.
Experts suggest that consumers be wary of any offer to sell them a
prepaid card for less than its face value, because it may have been
stolen or otherwise obtained improperly. When you first get a card,
inspect it for indications that any of the protective stickers have
been tampered with. It's also always important to promptly review your
monthly statement (online or on paper) to check for errors or fraud.
