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Pew: Prepaid is Better, But not as Well Protected

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Last month, the Pew Charitable Trusts published a study on the use, benefits and risks associated with general purpose reloadable (GPR) prepaid cards. If you’re looking into getting one, take the time to look into what restrictions and drawbacks, and benefits, are associated with them.

We’ve also compiled a few tips when approaching reloadable GPR prepaid cards, but found them wanting. The Pew study is a tad more optimistic of reloadable GPR prepaid cards. There’s no right or wrong here, though, there’s just two different takes on the same topic. That said, here’s what Pew found in their study:

First: the Pew study found that GPR cards are rising in popularity in the United States. In 2011, $56.8 billion was put onto GPR cards, in 2012 that number rose to around $64 billion. The suggestion by Pew is that GPR cards are being used as an alternative to checking or credit accounts, as prepaid cards generally have fewer and less expensive fees. Our NerdWallet study from early 2012 shows that the average cost of a prepaid debit card with no direct deposit is just under $300 annually. Pew reports that those costs have dropped slightly over the last year.

From 2012 to 2013, many prepaid cards dropped their transaction fees and started charging monthly fees instead. Those fees are set by the issuing company – much like a debit card. Pew reports that GPR cards offered by major banks are becoming less expensive and that, when compared to checking accounts offered at the same bank, prepaid cards are generally more economical.

Although they may be cheaper than opening and maintaining a checking account, Pew found several downsides to prepaid cards: the main problems are the federal regulations that apply to checking accounts aren’t applicable to prepaid cards. Sometimes this is because of the terms provided by an issuer, but it may be because liability is transferred to the cardholder – you. In other words, this means you’re not safeguarded against hidden fees, unauthorized transactions or loss of funds due to a problem within the card-issuing company. That’s a huge risk as cyber security becomes an increasing topic of concern for anyone connected to the Internet (you wouldn’t be reading this otherwise). Companies also aren’t required to disclose fees or terms and conditions associated with the card, nor are there any rules about opting-in to overdraft services, like the Federal Reserve Board requires for checking accounts. There also aren’t rules to prevent the attachment of additional credit products (like a line of credit) to the card.

So if you’re considering getting a prepaid card in lieu of (or accompanying) a checking account, you can expect to pay a little less, but keep in mind that you get what you pay for in terms of the security of your funds. We cannot say anyone is right or wrong to go with, or opt out of, prepaid cards — that’s your decision — but you should be aware of the risks associated with them.

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