Things You Should Know About Debit, Credit, or Prepaid Cards
Debit, credit and prepaid cards are widely used to pay for a variety of goods and services, and consumers often use them interchangeably. However, there are significant differences between these cards in how they work and the consumer protections provided for each card. That’s why the Federal Deposit Insurance Corporation has created a list of things you should know before using your credit, debit, or prepaid card.
- When deciding which card to use, keep in mind how they work. A credit card is essentially a loan. When you borrow funds using the card, you must pay the money back in addition to any interest that may be charged. You may have to pay interest if you do not pay the entire amount by a certain date. On the other hand, debit cards are issued by your bank and when you use them, the money spent is taken directly from your bank account. Prepaid cards can seem very similar to debit cards in the way that they work. They generally allow consumers to spend only the money deposited onto them, and include products such as “general purpose reloadable” (GPR) cards, gift cards, and payroll cards. GPR cards carry a network brand, such as Visa, MasterCard, or American Express, and may be used anywhere that other cards on that network are accepted. However, the consumer protections regarding prepaid cards are very different. As discussed further below, the major federal protections that would cover you if you used a debit card do not apply to most prepaid cards.
- Be aware of debit card overdraft fees. Overdraft fees can occur if you don’t have enough funds in your account when you swipe your debit card but the transaction is still processed. However, you must provide your bank with written permission in order for it to be able to charge you a fee for allowing you to continue to use your debit card when you do not have enough funds in your account. If you have overdrawn your account in the past, try to avoid these costly fees in the future by keeping track of your debit card purchases and other transactions and knowing your account balance.
- A credit card issuer cannot charge you a fee for going over your credit limit unless you agree to allow for over-the-limit transactions. A card issuer cannot permit you to go over your credit limit and then charge a penalty fee for having done so unless you explicitly agree to it (“opt-in”). You must tell your credit card company that you want it to allow transactions that will take you over your credit limit. If you do not, then any transaction that puts you over your credit limit may be turned down.
- Your liability for an unauthorized credit card transaction is generally limited to $50. Federal law limits your losses to a maximum of $50 if your credit card is lost or stolen, although industry practices may further limit your losses.
- Your liability for an unauthorized debit card transaction may vary. The maximum legal liability is $50 if you notify the bank within two business days after learning of the loss or theft of your debit card. Otherwise, your losses could be greater. You must also notify your bank within 60 days of your bank’s transmittal of your periodic statement on which an unauthorized transfer appears, in order to avoid liability for subsequent unauthorized transfers.
- The funds linked to a prepaid card may or may not be FDIC-insured. If an employer, government agency or other organization places money with an insured institution to hold for use in connection with consumers’ prepaid cards, and the bank holding the money fails, the funds will be considered deposits of the cardholders (as opposed to deposits of the organization) if certain specific requirements have been followed. One requirement is that the account must be set up so that the organization is documented as acting as the custodian of the funds, on behalf of the consumer cardholders, rather than as the owner of the funds. If the requirements for pass-through deposit insurance have been met, the individual consumer cardholder will be protected by deposit insurance up to applicable limits.
- Make sure you know about all fees associated with your prepaid card. Possible fees include those to activate (start using) the card, add money onto the card, make purchases, withdraw cash, inquire about your balance at an ATM (in addition to any fee charged by the company that operates the ATM you use), receive a statement in the mail or speak with a customer service representative. As a result, most prepaid cards end up costing more than the advertised monthly fee.
- A “hold” may be placed on funds in your bank account for debit card transactions. At the time of purchase, merchants immediately place a temporary hold or “block” on funds for the transaction as protection against fraud, errors or other losses. The hold will be removed when the final transaction is processed, nearly immediately or perhaps a day or two later, but until then, you won’t have access to that amount in your account.