The following is reprinted from FDIC Consumer News, Summer 2012.
Many consumers use debit, credit and prepaid cards, often interchangeably, to purchase goods and services. However, these three types of cards are quite different. Consider the following.
Each card works differently. If you use a credit card, you are borrowing money that you must pay back, in addition to interest, if you do not pay the balance in full by the due date. But, if you use a debit card, which is issued by your bank and linked to your checking or savings account, the money taken from the account is yours and you will never incur interest charges.
With prepaid cards, you are spending the money deposited onto them, and they usually aren’t linked to your checking or savings account. Prepaid products include “general-purpose reloadable” cards, which display a network brand such as American Express, Discover, MasterCard, or Visa; gift cards for purchases at stores; and payroll cards for employer deposits of salary or government benefit payments. Be aware of the possibility of unanticipated fees and, with certain types of these cards, the potential for limited consumer protections against unauthorized transactions.
Watch for fees. You may be charged an overdraft fee if you use a debit card for a purchase but there are not enough funds in the account and you have given your bank written permission to charge you for allowing the transaction to go through. “You can always revoke that authorization if you don’t want to risk paying these fees, and future debit card transactions will be declined if you don’t have the funds in your account,” explained FDIC Consumer Affairs Specialist Heather St. Germain.
Similarly, a credit card issuer may decline a transaction that puts you over your credit limit unless you have explicitly agreed to pay a fee to permit over-the-limit transactions.
Prepaid cards are sometimes marketed with celebrity endorsements and promotional offers. “While some prepaid card offers seem attractive, remember that you may have to pay various fees on the card,” said Susan Boenau, Chief of the FDIC’s Consumer Affairs Section. “These costs may include monthly fees, charges for loading funds onto the card, and fees for each transaction.”
As an alternative to a traditional checking account or prepaid card, consumers who don’t plan to write checks but do want to bank electronically may want to consider opening a “checkless” transaction account that allows you to pay bills and make purchases online or with a debit card.
Your liability for an unauthorized transaction varies depending on the type of card. Federal law limits your losses to a maximum of $50 if a credit card is lost or stolen. For a debit card, your maximum liability under federal law is $50 if you notify your bank within two business days after learning of the loss or theft of your card. But, if you notify your bank after those first two days, under the law you could lose much more.
Your liability for the fraudulent use of a prepaid card currently differs depending on the type of card. Federal law treats payroll cards the same as debit cards, but currently there are no federal consumer protections limiting your losses with other general-purpose, reloadable prepaid cards and store gift cards. The Consumer Financial Protection Bureau is considering increasing the consumer protections for prepaid cards, but any action is likely to be a year or more away.
In addition, the funds you place on a prepaid card may or may not be covered by deposit insurance in the event of a bank failure, depending on how the account where the funds are held is set up and whether the bank or the card issuer’s records at the time of the bank closing identify each cardholder’s ownership interest.
For all cards, industry practices may further limit your losses, so check with your card issuer.
Also take steps to guard any cards from thieves. Never provide any numbers in response to an unsolicited phone call, e-mail, text message or other communication you didn’t originate. Immediately review your statement for unauthorized transactions.
To learn more about the three types of payment cards, visit www.fdic.gov/consumers/consumer/information/ncpw/index.html, which includes an FDIC “quick guide” to understanding the differences in the cards.