Prepaid debit cards are a convenient way to spend, particularly among credit-card–averse Millennials. According to a TD Bank survey, 25% of Americans use prepaid plastic to pay and among 18 to 34-year-olds, that figure climbs to 33%. They're also a necessity for people with no (or a bad) credit history.

While prepaid debit cards have their upsides, their convenience often comes with a price in the form of high fees. In October 2016, the Consumer Finance Protection Bureau (CFPB) enacted a new rule to offer cards greater federal protections to consumers who use these cards, which are designed in part to address the fee issue. 

The rule, which is now set to take effect on April 1, 2018 (the original date was October 1, 2017), has come under fire from members of Congress who see it as over-regulationIf you’re a prepaid card user or you’re considering one of these cards as an alternative to a credit card or checking account, it’s important to understand the scope of the CFPB’s rule and the potential impact of its nullification.

When You Can't Get a Credit Card …

Prepaid cards are tailored to consumers who are either unbanked or under-banked. Data from the Federal Deposit Insurance Corporation (FDIC) shows that in 2015, 27% of American households either lacked a bank account or used alternative financial services, such as payday loans and check-cashing services, to supplement their bank account. 

Fifty-seven percent of those surveyed said they were unbanked because they simply didn’t have enough money to keep in their account. Sixteen percent said issues with creditworthiness kept them from pursuing a traditional banking relationship. 

One of the pros of a prepaid card is that the cash is paid up front, so it's more difficult to get into debt trouble – although some cards allow an overdraft. Prepaid cards have many of the same perks as credit cards, including the ability to shop online. Prepaid cards can also be used when renting hotel rooms or cars that require a preauthorization.

The problem is that prior to the CFBP’s rule, prepaid cards didn’t offer the level of protection that a credit card does. If you someone steals your credit card, for example, your liability for fraudulent purchases is limited to $50. If you lose your prepaid debit card, it’s up to your card’s issuer to determine whether to give you a refund. (Learn more: Am I responsible for fraudulent charges on my credit card?

What the CFPB’s Rule Would Do

The CFPB’s rule is intended to address a number of prepaid debit card issues, starting with offering protections for lost or stolen cards. The rule would protect consumers against withdrawals, purchases or other unauthorized transactions if their card is lost or stolen and limit their liability for those charges to $50.     

The rule would also give prepaid card users certain protections under the Electronic Fund Transfer Act. For example, prepaid card issuers would have to ensure that consumers have free and easy access to their account information, including their account balances, transaction history and the fees they’ve been charged. Prepaid card issuers would also be responsible for investigating claims of fraudulent or unauthorized charges and investigating them in a timely manner, similar to the protections credit card users enjoy under the Fair Credit Reporting Act (FCRA).     

The provision regarding transparency in the fee schedule is especially important considering that many of these cards levy fees for their use. In 2016, the average prepaid card charged 10 separate fees, with some cards charging as many as 17 different fees.     

Because these cards are loaded with your own funds up front, there’s nothing to charge interest on like a traditional credit card. Prepaid card contracts can come with litany of fees in the fine print. Using a prepaid card regularly can mean paying fees for purchases as well as fees for paying bills, calling customer service, receiving account updates and shortages – an overdraft fee without calling it that. (See also: The Ins and Outs of Bank Fees.)

The CFPB’s rule would require card issuers to spell out those fees clearly and provide consumers with easy-to-understand disclosures, explaining what they’ll pay. Card issuers would also have to post individual card agreements on their website so consumers can more easily shop around and compare different card terms. 

Lawmakers, however, are seeking to repeal the rule before it officially hits the books. Led by Sen. David Perdue (R.-GA), Republicans submitted a joint resolution to the Senate, which calls for scrapping the CFPB’s rule under the Congressional Review Act (CRA). This is one of a number of actions on the part of GOP members to curb the authority of the CFPB, including a move to reverse its ban against mandatory arbitration clauses.

Paying High Prices for the Cheaper Alternative

Simply put, prepaid cards fall short when compared to a debit card or even a credit card. They're not significantly more secure – and if the number does get stolen, expect a fee when you call to report it. These cards also don't help you build up your credit. They can, however be a cheaper alternative to overdraft fees or high credit card interest. (Read: Should You Close Your Credit Card?)

If Congress succeeds in putting the kibosh on the CFPB’s rule, the result could be costly for prepaid card users. Without any checks to prevent heavy fees, consumers could find themselves spending more of their hard-earned dollars to pay for the convenience that prepaid cards provide. That could be especially problematic for low-income households that are already stretched thin financially. 

The Bottom Line

Prepaid debit cards are more appealing than credit cards or checking accounts in some respects, but fees keep them from being a perfect alternative to either. Taking the time to read the fine print of your prepaid card agreement so you clearly understand the costs involved can help you determine whether it’s the right fit for your needs.

And look into secured credit cards. Unlike prepaid debit cards, these often can help you build a credit history that will give you access to better choices in the future. (See Getting a Secured Credit Card.)


Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.