Consumer Cautions on Prepaid Cards
During the last three years, the banking industry has been hammered by bad loans, increased regulations and a recession. During this time, prepaid cards have been one of the few bright spots of revenue growth for banks and lenders.
Consumers loaded approximately $57 billion onto prepaid cards in 2011, and loads are projected to reach approximately $82 billion in 2012, $117 billion in 2013, and $167 billion in 2014, according to the Mercator Advisory Group
Currently, there are no government regulations and consumer protections on prepaid cards–debit and credit card rules and regulations do not apply. But that may soon change. The Consumer Financial Protection Bureau is investigating the fees and practices of prepaid cards and seeking input on ways to enforce safety for consumers.
States are also taking action. A New Jersey Assembly committee is pursuing a bill that would limit fees and increase disclosure and transparency for consumers.
Government payments and refunds can be made directly to a prepaid card. Prepaid cards are also being used as a checking account with direct deposit for salary and ATM access. As usage becomes more mainstream, some consumer protections are needed.
Regulations may help, but consumers should take steps to educate and protect themselves with prepaid cards. Here are some important tips about using prepaid cards:
* Prepaid cards have limited or no impact on your credit history. According to the CFPB, the three main credit bureaus used by most lenders do not include your prepaid card usage in your credit report. The prepaid card providers that claim to report your credit history usually only report to smaller used credit reporting agencies and not one of major three agencies.
* Shop around and read the fine print because all prepaid are not the same. The terms and conditions may be long and confusing, but it is important to read these before you get the card so you will know where your money goes.
* If your prepaid card expires while you have money on it, request a replacement card or a check to cash out the card. When a prepaid card or gift card is unclaimed for a designated period, some states have escheatment laws that require the issuer to send the funds to the state of the last known address. The state can take custody of the card and add the value to the treasury’s general fund until it is claimed by the rightful owner. The time of abandonment varies by state, but is typically two to five years.
* A prepaid card may have a card network logo for Discover, Visa, MasterCard, and American Express, but it is not a credit card. When you use a prepaid card, you are using your own money that you have already put on the card. Using a credit card is receiving a loan to make a purchase.
* Almost anyone can get a prepaid card–all you need is identification to prove who you are. Credit checks are not used and your credit score does not matter. You will have to provide name, address, date of birth, Social Security number or another identification number. Non-citizens may also get a prepaid card if they have an identification number.
* Most prepaid cards are reloadable. Your employer can deposit your paycheck directly to your prepaid card and you can also receive government payments on your card. You can buy reload packs at many retailers like Wal-Mart and CVS, then enter the reload value online and the funds are immediately available.
* Know your ATM networks and fees. You can use your prepaid card to withdraw cash at ATMs but the fees can add up if the ATM is out of your network. You will also have to pay any fees that the ATM owner charges.
* Many prepaid cards charge for almost every transaction (except purchases), so shop around for the card with the lowest fees.
* Your prepaid card will be accepted by most places that accept a credit card, but it may be treated differently and you may need to plan ahead. If you use your prepaid card to pay for gas at the pump, rent a car, or pay for a motel room the merchant may put a hold on your account for the amount of the transaction plus up to 20% to make sure there are sufficient funds to cover the purchase plus tips and other expenses. The hold is removed after payment is received. It can take from 15 days to 90 days for the hold to be removed. During the hold period, you will not have access to the preauthorized amount.
* Prepaid cards can be used for international transactions, but pay attention to fees. There may be a 3% fee for foreign transactions (just like a standard credit card) and fees for ATM withdrawals.