Prepaid “credit card” : the cost is convenient
Prepaid debit CARDS are a convenient way to spend money, especially among millennials with credit CARDS. According to a survey by td bank, 25 percent of americans use prepaid plastic payments, compared to 33 percent of 18 – to 34-year-olds. It is also a necessity for people who have no (or bad) credit record.
Although prepaid debit CARDS have their advantages, their convenience often comes in the form of high fees. In October 2016, the consumer financial protection agency (agency) developed a new regulation, for consumers to use these CARDS to provide more federal saving, these CARDS part is designed to solve the problem of cost.
The rule will now take effect on April 1, 2018 (originally scheduled for October 1, 2017), and members of congress consider it too restrictive. If you are a prepaid card user, or if you are considering a card as a replacement card for a credit card or checking account, be sure to understand the scope of the CFPB rules and the potential impact of the cancellation.
When you can’t get credit CARDS…
Prepaid CARDS are suitable for consumers without bank accounts or bank deposits. From the federal deposit insurance corporation (FDIC), according to data in 2015, 27% of American households do not have a bank account, or use other financial services (such as payday loan services) and cheque to complement their bank account.
Fifty-seven percent of those surveyed said they didn’t have a bank account because they didn’t have enough money to keep an account. Sixteen percent said the credibility issue left them unable to pursue traditional banking relationships.
One of the advantages of prepaid CARDS is that the cash is paid upfront, so it’s harder to get into debt trouble – although some CARDS allow overdrafts. Prepaid CARDS have many of the same privileges as credit CARDS, including the ability to make shopping online. Prepaid CARDS can also be used to rent hotel rooms or cars that require pre-authorization.
The problem is that prepaid CARDS don’t provide the level of protection that credit CARDS offer before the CFBP rules. For example, if someone steals your credit card, your liability for fraudulent shopping is limited to $50. If your prepaid debit card is lost, your card issuer decides whether to give a refund. (for more information: am I responsible for fraudulent charges on my credit card?)
What will CFPB’s rules do
The CFPB rules aim to address some prepaid debit card issues, starting with the protection of lost or stolen CARDS. The regulation will protect consumers from withdrawals, shopping or other unauthorized transactions and limit their liability to $50 within 50 dollars of their CARDS being lost or stolen.
Under the “electronic funds transfer law”, the rule will also provide some protection for prepaid card users. For example, prepaid card issuers must ensure that consumers are free to access their account information, including account balances, trading history and fees charged. Prepaid card issuers are also responsible for investigating fraudulent or unauthorized expenses claim for compensation, and timely investigation, similar to a credit card under the fair credit reporting method (FCRA) that credit card users enjoy protection.
Given that many of these CARDS are charged for their use, the provision of transparency in the cost details is particularly important. In 2016, the average prepaid card charges 10 independent fees, some of which charge up to 17 different fees.
Since these CARDS are pre-loaded with their own money, there is nothing like a traditional credit card to charge interest. The prepaid card contract can be used for payment with fine printing. Regular use of prepaid CARDS may mean paying for purchase expenses and paying bills, calling customer service, receiving account updates and a shortage of expenses – overdraft fees, not so. (see also: cancellation of bank charges)
The CFPB rules require issuers to clearly state these costs and provide consumers with easy-to-understand disclosures that explain the costs they will pay. The card issuer must also publish a personal card agreement on its website so that consumers can more conveniently shopping and compare different card terms.
Lawmakers, however, are trying to repeal the rule before it is officially published. The republican party, led by republican senator David Perdue (R. -ga), submitted a joint resolution to the federal senate that would require the removal of the CFPB under the congressional review act (CRA). It was part of a campaign by republicans to curb the CFPB’s power, including measures to reverse a ban on compulsory arbitration.
Pay higher prices for cheaper options
In short, prepaid CARDS are not enough compared to debit CARDS or even credit CARDS. They’re not that safe – if the number is stolen, you charge when you call to report. These CARDS won’t help you build your credit. But they can be cheaper alternatives to overdraft fees or higher credit card interest. (read: if you close your credit card?)
If congress succeeds in putting gibbs in the CFPB, the result could be expensive for prepaid card users. Without any checks to prevent overcharging, consumers may find themselves spending more of their hard-earned cash to pay for prepaid CARDS. That could be particularly problematic for low-income families already in the financial sector already weak.
The bottom line
Prepaid debit CARDS are in some ways more attractive than credit CARDS or checking accounts, but fees make them not perfect choices. Take the time to read the details of your prepaid card agreement so that you can clearly understand the costs involved to help you determine if it is right for your needs.