Prepaid “credit card” : convenient charge
Prepaid debit CARDS are a convenient way to spend money, especially among millennials with credit CARDS. According to a td bank survey, 25 percent of americans pay with prepaid plastic, compared with 33 percent of 18 – to 34-year-olds. It is also a necessity for people with no (or poor) credit history.
Although prepaid debit CARDS have their advantages, their convenience usually comes in the form of high fees. In October 2016, the consumer financial protection agency set new rules to provide more federal savings for consumers to use CARDS that are partly aimed at solving cost problems.
The rules, which will now take effect on April 1, 2018 (originally scheduled for October 1, 2017), are considered too restrictive by members of congress. If you are a prepaid card user, or if you are considering a replacement card for a credit card or checking account, it is important to understand the scope of CFPB rules and the potential impact of cancellation.
When you can’t get a credit card
Prepaid CARDS are applicable to consumers who do not have bank accounts or bank deposits. According to the federal deposit insurance corporation (FDIC), according to 2015 data, 27% of American households do not have a bank account, or use other financial services (such as payday loan services) and check to replenish its bank account.
Fifty-seven percent of respondents said they don’t have a bank account because they don’t have enough money to keep it. Sixteen percent said the credibility issue prevented them from pursuing traditional banking relationships.
One advantage of prepaid CARDS is that cash is prepaid, so it’s hard to get into debt problems – although some CARDS allow overdraft. Prepaid CARDS have many of the same privileges as credit CARDS, including the ability to shopping online. Prepaid CARDS can also be used to rent hotel rooms or cars that require prior authorization.
The problem is that prepaid CARDS do not provide the level of protection that credit CARDS provide 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 issuing authority will decide whether to refund it. (for more information: am I responsible for fraudulent charges on my credit card?)
What will the CFPB’s rules do
The CFPB rule aims to address some prepaid debit card issues, starting with protecting lost or stolen CARDS. The rules will protect consumers from withdrawals, shopping or other unauthorized transactions and limit their liability to $50 for a $50 card that is lost or stolen.
Under the electronic funds transfer act, the rules will also provide some protection for prepaid card users. For example, prepaid card issuers must ensure that consumers have free access to their account information, including account balances, transaction history and fees. Prepaid card issuers are also responsible for investigating fraudulent or unauthorized expenses claim for compensation, and timely investigation, similar to credit card users enjoy protection under the fair credit reporting method (FCRA) of credit card.
Given the cost of using many of these CARDS, it is especially important to provide cost detail transparency. In 2016, the average prepaid card will charge 10 separate fees, some of which can charge up to 17 different fees.
Because the CARDS come with their own money, there’s nothing like a traditional credit card that charges interest. Prepaid card contracts can be used for fine print payments. Frequent use of prepaid CARDS can mean paying for purchases and bills, calling customer service, receiving account updates and fee shortfalls – overdraft fees, not so. (see also: cancellation of bank charges)
The CFPB rules require issuers to specify these costs and provide consumers with easy-to-understand disclosure to explain the costs they will pay. Card issuers must also publish personal card agreements on their websites so that consumers can more easily shopping and compare different card terms.
However, lawmakers 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 calling for the CFPB’s removal under the congressional review act (CRA). It is part of a republican campaign to curb the CFPB’s power, including the lifting of a ban on compulsory arbitration.
Pay higher prices for cheaper options
In short, compared with debit CARDS and even credit CARDS, prepaid CARDS are not enough. They’re not safe – if the number is stolen, you’ll be charged for calling to report it. These CARDS will not help you build credit. But they can be cheaper alternatives to overdraft fees or higher credit card interest rates. (if you close your credit card, read it?)
If congress succeeds in putting gibbs into the CFPB, the result could be expensive for prepaid card users. Without any checks to prevent overcharging, consumers may find themselves spending more hard-earned cash on prepaid CARDS. This may be particularly problematic for low-income families already in the weak financial sector.
The bottom line
Prepaid debit CARDS are in some ways more attractive than credit or checking accounts, but fees make them imperfect choices. Take the time to read the details of the prepaid card agreement so that you can clearly understand the costs involved to help you determine if it is appropriate for your needs.
Look at a secure credit card. Unlike prepaid debit CARDS, these cartoons can help you establish credit records so you can have better options in the future.