banking

Ditch checking for a prepaid debit card?

Overdraft fees change the equation

Prepaid debit cards can be a lower-cost solution for one group of checking customers -- serial overdrafters.

Even incurring one overdraft per month can drastically increase the cost of a traditional checking account, Fox says.

"Typically banks will charge you $35 per overdraft of just a few dollars or pennies, depending on what the bank's parameters are," Fox says. "So that is the big cost risk of having a traditional bank account that you might overdraw."

That risk is compounded by the risks to your credit report, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies in Fairfax, Va.

"It is possible that if you constantly have overdrafts, that information could get into your credit report," he says. "You're not going to get any information from a prepaid debit card, and it is not going to help you with your credit report at all."

Fortunately, there's an easy way to avoid debit overdraft charges on a traditional checking account. Federal Reserve rules require banks to seek customers' approval before enrolling them in such programs. Customers can simply opt out, Fox says.

Still, those who have trouble managing a checking account will still be on the hook for overdrafts.

"In order to make a bank account a lower-cost option," Fox says, "you have to say 'no' to overdraft coverage, and then you have to very carefully monitor your available balance so that you don't write a check that is not covered with the money that you have on deposit or you don't set up an electronic payment."

Consumer protection lacking

Because they're fairly new products, lawmakers and regulators haven't had time to solidify consumer protections for prepaid cards to the same degree as checking accounts, Fox says.

For instance, prepaid debit card balances are parked at a bank contracted by the prepaid card company. It's not clear whether an individual prepaid debit card holder's balance would be protected if the bank failed, Fox says.

"There are questions about the extent to which FDIC (Federal Deposit Insurance Corp.) insurance protects the money that is being held in a pooled account," she says. "Those accounts have to be structured in such a way that the card issuer can identify the individual persons so that the insurance passes through to protect you individually."

Fraud protections also are lacking, which could come into play should a thief steal a prepaid cardholder's payment information, Fox says.

That's because general-purpose reloadable prepaid cards aren't covered under Regulation E of the Electronic Fund Transfer Act, which limits debit card holder liability for unauthorized purchases, she says.

That creates an extra burden for cardholders.

"You have to monitor the transactions on your card because you don't have automatic protections that come with a regular debit card," she says.

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