Prepaid cards can make effective budgeting tools — and provide a convenient option for those without bank accounts. Between 2008 and 2012, consumers loaded nearly $77 on to them, according to Mercator Advisory Group.
Yet watch out. Although the cards often come with protections that make them safer than cash, those protections aren't required by law — and the way the cards are loaded can be exploited by fraudsters.
“There are very clear consumer protections for credit cards, and the liability for fraud is with card issuers, not with the cardholder,” says Tom Feltner, director of financial Services at the Consumer Federation of America. “However, not all of those protections apply to prepaid debit cards.”
Credit and debit vs. prepaid
When it comes to credit cards and debit cards tied to bank accounts, card issuers by law must pick up losses incurred from fraud. Under the Fair Credit Billing Act, you're liable for
|Reloading presents a risk|
Despite the fact that your money is generally safer than cash once it's on the prepaid card, there's a security hole when it comes to loading the cards. Many consumers use reload services, such as the Green Dot MoneyPak, to replenish the funds on a prepaid card. Once the reload is purchased, the consumers receive a 14-digit number, which they can use to transfer the money to a prepaid card online or by phone.
However, until that money is loaded into a prepaid account in your name, carrying around cash reloads is risky. If you lose the paperwork, or a thief intercepts the reload number, your money is gone. Scams have been reported of thieves posing as electric company employees and online sellers, asking victims to buy MoneyPaks and send them the numbers as payment.
only up to $50 in fraudulent credit card charges (and most issuers waive that cost), and you're liable for nothing if you report the loss or theft before any fraudulent charges occur. Bank-issued ATM and debit cards tied to checking accounts, meanwhile, are protected by the Electronic Funds Transfer Act, which limits your liability to $500 (far less or nothing, depending on your bank, if you report the card missing or stolen within two days).
Consumers who use prepaid cards do have some protections, although they're not enforced by federal law — they're extended voluntarily by the card issuers. But that doesn't mean that, if you lose your card, you won't lose the money on it. All major prepaid card providers provide protections against fraud, according to the Consumer Financial Protection Bureau, and will reimburse at least some stolen funds if your card or PIN is used fraudulently.
Even if your card offers protection for loss or theft, a prepaid card that goes missing can be costly. Terms vary, but for many cards, if you notify your card provider within two business days of discovering that your card or PIN number has been lost or stolen, the loss will be capped at $50. If it takes more than two business days, you could risk losing up to $500, according to the CFPB. Those caps can fluctuate, depending the specific card terms.
To minimize your risk, follow these four steps:
- Read your card agreement. Loss protections vary widely. For some prepaid cards, if the loss of the card or PIN number is not reported within 60 days, you could lose the entire amount loaded onto the card, according to the CFPB. Be sure you know the rules that apply to your card.
- Treat your prepaid card like cash. You wouldn't have cash lying around easily accessible, so don't be careless with a prepaid card. Don't share your PIN, and keep your prepaid card and PIN in separate locations.
- Check balances regularly. Sign up for an online account so it's easy to access balances and check the account regularly. That way you'll know immediately if any unusual activity occurs and can report it.
- Be careful with reloads. If you're topping off a prepaid card via a cash reload (such as GreenDot's MoneyPak), be careful (See sidebar). Never give the reload receipt to a third party, never use a number to pay for things purchased through a classified ad and never provide the number as a condition to collect a prize or sweepstakes. Ideally, load the money onto a prepaid card registered in your name immediately to limit your risk. “There are very few protections against fraud or theft that apply to the prepaid money packs,” Feltner says. “Until you've loaded those funds onto a registered prepaid card account in your name, they offer no protection whatsoever.