Risky Business: Prepaid Cards

February 4, 2014

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Prepaid debit cards are a popular alternative to a debit card linked to a bank account, but there are potential dangers to using them and customers should choose cards carefully and wisely.

Some cards offer a major risk of monetary loss. A few of the cards aren’t FDIC-insured, meanings if the bank purchases dangerous strategies with the money transferred and loses it all, card holders could be stuck with the costs.

Last year, the Bench Charitable Trust released a report on a considerable study of prepaid cards, or general function reloadable cards (GPRs). The report suggested it’s possible that, in the event of both a bank failure and bad record-keeping, GPR customers could possibly lose their deposits. “The funds must be composed an FDIC-insured account and the balances and identifications of the actual owners of each GPR prepaid card must be tracked by either the business or the bank. Failure to do so would trigger just the larger account itself to be insured, however not the individual prepaid cardholder,” according to the report.

Consumer Reports and Consumers Union both just recently ranked the American Express for Target card as being among the worst GPR. Not just is the card not insured by the FDIC, but without a savings account, it can only be refilled at Target stores and usage is swarming with fees.

Most of the various other problems Pew, and more recently in Customer’s Union July report on GPRs, are related to charges. Some can be extremely costly to use, however it can be hard for consumers to navigate the the regards to each card.

The problem is that charge structures for prepaid cards are inconsistent, making it challenging for consumers to compare cards accurately. MyBankTracker has actually reported on this in the past and the Consumers Union report concurs.

The Pew report specified that nearly 60 percent of prepaid cards don’t disclose whether or not they charge a cost for a decreased point-of-sale transaction. The median for those which do is about a dollar, but if it is not revealed, the customer may not understand about the possibility at all. Over 40 percent didn’t disclose whether a cost is charged when making use of an issuing-bank’s (exclusive) ATM, although less than 10 percent failed to disclose fees for utilizing a nonproprietary ATM. Unsurprisingly, all companies who revealed charged a cost in the last category.

Other fees include activation charges, per-swipe or “interchange” costs, month-to-month costs, reloading charges, dormancy charges when the card is not utilized typically enough, and balance inquiry charges, amongst many others.

Adding to the threats positioned by GPR use is the fact that investments aren’t subject to the Electronic Funds Transfer Act. The EFT regulation provides consumer securities against unauthorized use, although some GPRs offer this service on a voluntary basis. Consumers Union just recently reported the terms of these offers are frequently “slightly defined” which could lead some customers to think they’re covered when they’re not.

Consumers Union also kept in mind lots of cards have added new functions such as account informs by text message and various other account management tools. However, the organization said in some cases these tools were also not plainly explained, which might undermine their value to customers.

Still, for some there are clear advantages. Church bench found that customers who were the most unskilled with financial really took advantage of the use of GPRs. Their research showed that consumers in this category were likely to spend less than $29 per month while making use of a prepaid card, but as much as $94 month-to-month as a typical figure. Typical individuals invested about $22 on GPRs and $28 on checking accounts, while savvy consumers spent just about $4 per month in costs to utilize checking accounts, and about $4.50 for a GPR.

Pew exposed most customers of prepaid cards were doing so to stay clear of hidden bank charges or unintentional overcharges. One individual in its study stated, “I ‘d take the $3.95 (charge) any day over the $35 overdrafting or for some other fee.”