What To Know Before Using A Prepaid Debit Card

Illustration by Louisa Cannell.

In some places, banks and ATMs proliferate like weeds. In other areas, customers might have an easier time finding a check cashing place than a place to deposit their money — if they're able to do so at all.

The 2015 FDIC National Survey of Unbanked and Underbanked Households found that 19.9% of U.S. households (that's approximately 51.1 million adults) were underbanked in 2015. An additional 7% of U.S. households were unbanked, meaning that no one in the household had a checking or savings account.

Unbanked groups in particular tend to lean heavily on prepaid debit cards. The FDIC estimated that more than 27% of those households used a prepaid card in 2015; that's compared to just 7% for fully banked households.

Unfortunately, even though prepaid debit cards can be a vital option for people who have few options, relentless fees are one of their costliest downsides. This is especially concerning since a common reason people use prepaid debit cards in the first place is to avoid fees, or because they don't have enough money to keep in a traditional bank account (given some mandatory checking account balance requirements).

If you're weighting the pros and cons of using one, know the ins and outs first.

What Are Prepaid Debit Cards?

As explained in their name, prepaid debit cards utilize money loaded onto a card in advance, unlike bank debit cards, which are linked to and pull money from a checking account. Prepaid debit cards are often utilized by underbanked and low-income workers, and parents on behalf of their children. For instance, WalletHub's 2017 Prepaid Cards Report tracked usage among four key groups: people seeking an alternative to a checking account, those wanting a low-cost check cashing option, parents wanting to dispense a child's allowance, and people who need access to electronic transactions.

"Ideally, a prepaid card should be used as a replacement for a checking account," says WalletHub analyst Jill Gonzalez. "Approval is guaranteed, and it functions just like a debit card linked to a checking account would."

Plus, there is less of a risk of being hit with overdraft fees since, "in most cases, customers can't spend more money than have already loaded onto their card," the Consumer Financial Protection Bureau (CFPB) explains.

Who Uses Them?

Some workers receive their wages on prepaid debit and payroll cards that charge them just to withdraw their money. Whether employees are subject to that depends on state laws, making the outlook kind of bleak as the current presidential administration leans toward less federal regulation.

"The employer must also offer you at least one other way to get paid — for example, a paper check or direct deposit to an account of your choice, such as a bank account or your own prepaid card," the CFPB says, so consumers are under no obligation to accept them.

Additionally, some federal benefits may be dispensed through prepaid debit cards, such as veterans' and Social Security benefits. Users of those cards may still subject to fees "for using and maintaining the card."

"The types and amounts of fees you can be charged for using the card depend on the contract between the government agency and the card issuer. Read the cardholder agreement carefully before using the card to understand how you can avoid fees," the CFPB advises.

What Are The Risks?

Fees, fees, fees, and more fees.

"Most offers include a variety fees, which can add up quickly if you choose the wrong card for your needs," says Gonzalez.

WalletHub found that the average prepaid debit card comes with 10 different fees. Some, like the Wired Plastic Prepaid Card, had nearly 20, including an activation fee, a monthly maintenance fee, a pin transaction fee (incurred whenever a customer uses their PIN to process a transaction), and even an in-network transaction fee for cash withdrawals from an ATM.

Other cards may charge users for checking their card's balance or contacting customer service. Here is a list of the most common fees associated with prepaid debit cards via the CFPB. Last year, the Bureau investigated more than one million consumer complaints, including unauthorized transactions, difficulty registering and using cards, resolving claims, and lack of access to funds.

Not all risks are instigated by card users. In 2015, thousands of RushCard customers were cut off from their money for more than a week due to a technical problem on the company's end. That may seem like a short amount of time to some people — unless your rent check is due, or you need fast access to prescription medication, as some did. RushCard settled a lawsuit for $19 million but the problem was hardly an anomaly. In 2016, Walmart prepaid debit card customers complained of being unable to view account balances, activate new cards, or having their cards declined. The New York Times reported that in 2014, "Green Dot, the largest seller of prepaid cards, said it would stop selling its popular MoneyPak because of how easy it was to use the product to conduct online and telephone fraud."

How Can You Protect Yourself?

As explained in the Times, a big problem with prepaid debit cards is that they "lack many of the basic consumer protections credit cards and bank debit cards are required to offer" — leaving consumers high and dry when something goes wrong.

But starting next month, federal rules passed last year will kick in to consumers' benefit, from monthly billing statements, "reasonable" time windows (21 days) for consumers to repay debt before being charged a late fee, limited fees and interest rates, standardized disclosures of cards' monthly fees, detailed explanations of fees for cash withdrawals, customer service, and more.

The CFPB lobbied for the rules, which can be found here. The Bureau also provides examples of what some of these disclosures will look like here. Their "Know Your Rights" page also outlines considerations for card usage.

If you're trying to choose the right card for you, get familiar with what is available before you sign up. The CFPB has a useful guide that can help determine your needs, depending on how often you plan to use the card, how you plan to use it (ex.: for purchases or cash withdrawals), and if you want direct deposit. The Bureau also recommends registering your card to receive more protections in the event a card is lost or stolen.