CFPB Looking at Reloadable Prepaid Cards

With the CFPB dominating the news latetly with their oversight of the credit bureaus and their action against Capital One for the deceptive marketing of payment protection plans we almost forgot to cover their interest in my least favorite of all payment methods…the prepaid debt card.

I have written many articles about the Consumer Financial Protection Bureau (CFPB), which was created to be the consumer watch dog.  They are the consumer protection agency with authority to take action against companies in the financial industry that engage in deceptive practices. One of the latest products they are targeting is prepaid cards.  I have not been shy about my opinion of these prepaid cards.

Hidden fees

Reloadable prepaid cards are “loaded” with many fees and aren’t protected from being lost or stolen.  You are charged fees to activate the card, put money on the card, use it, withdraw money at ATMs, maintain it monthly, request the balance, and talk to a live person. If there is an error it can take weeks to get the issue resolved.  If the card is lost or stolen, the money is not returned to your account until the investigation is completed, which can take several weeks. Some banks provide protection for prepaid cards, but most retailers that issue these cards don’t.

Some consumers load their entire paycheck onto the prepaid card and consider this a means of budgeting and only spend what is on the card. What happens if their card is stolen and there isn’t any protection?  Their money won’t be retuned until the research is completed.  What will they do in the meantime? It is much cheaper to find a local bank or credit union that offers free checking, instead of using a reloadable prepaid card.

CFPB considering new rules

The Consumer Financial Protection Bureau is considering creating rules for loadable pre-paid cards that give the same protection as credit and debit cards such as fees and terms, fraud protection, and card features. Here are the details of what they think should be regulated:

Fees and terms – There is no industry-standard for the disclosure of fees for prepaid cards. The bureau hopes to find a method for consumers to be notified of card costs and features that can be read prior to purchase. Currently it is printed on the inside of card packaging.

Fraud protection – The bureau is considering extending the limited liability for unauthorized transactions to be similar to credit and debit cards. Currently there is no liability.

Card features – Most prepaid cards offer limited features, but some include add-ons such as a line of credit, credit repair program, or a savings account. The bureau plans to investigate these types of card features further to consider the costs and benefits.

“We need to make sure these products are safe for consumers, and that prepaid card managers do not make money by relying on tricks and traps that are unsustainable for card holders,” Richard Cordray, CFPB Director said. “Success in the marketplace is hollow if it comes at the expense of consumers.”

Advocates of prepaid cards support them for the unbanked or under banked, especially for those who bounce checks. According to them, the fees they pay for prepaid cards are cheaper than paying overdraft fees of $35 per bounced check.  You won’t have these issues if you don’t spend money you don’t have. And despite what some celebrity endorsers have said…you don’t build or rebuild your credit reports with a prepaid card.

Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Credit Monitoring, Credit Report, Credit Score, Debt, Money & Identity

This post was written by John Ulzheimer