Are Prepaid Cards Safe?

Prepaid debit cards offer an alternative to credit cards and traditional bank debit cards. But are they as safe to use?

Every time you turn around these days, you hear about scammers, hackers, and other bad actors trying to separate us from our hard-earned money. The news is riddled with stories of big company data breaches. Kind of makes you want to stuff your money in the mattress.

But despite the seemingly never-ending rise of fraud in the age of electronic transactions, the good news is that a host of protections guard against an individual consumer bearing many of the losses caused by the dishonest.

And the very same protections that cover credit cards, bank debit cards, and bank accounts apply to prepaid debit cards.

Unauthorized Charges on Your Prepaid Card

I’ve previously written about what happens if your prepaid card gets lost or stolen. Of course, the issue isn’t so much losing your physical card. The issue is that someone with your card (or card information) buys stuff on your account. Lost, stolen, or just unauthorized, you have solid protections to get your money back.

Visa and Mastercard Have Your Back

Visa and MasterCard both offer nearly identical protections against unauthorized charges to their cardholders. Under their Zero Liability policy, cardholders are not responsible for any losses from unauthorized charges.

And nearly every prepaid card is a Visa or Mastercard. If you’re using an American Express branded card, never fear. AMEX has its own Zero Liability policy too.

So what’s the catch?

Visa and Mastercard protect against fraudulent transactions only if they’re processed through their networks. So, debit transactions or ATM withdrawals aren’t covered because they’re processed on other networks–like Interlink or MoneyPass. Yeah ok, I guess that’s fair.

One other limit. The credit card network won’t cover you if you unreasonably delay reporting a lost or stolen card (or the unauthorized charges that result). So don’t sit on your hands if you discover a problem. Report it.

‘It’s Not Just a Good Idea. It’s the Law’

Debit card consumer protections are just like the old ad slogan for the national 55 MPH speed limit (for those with sufficient maturity to remember it). It’s not just a good idea. It’s the law.

The federal Electronic Funds Transfer Act makes debit card issuers, rather than debit card users, largely responsible for unauthorized charges on the card. As of 2019, this protection applies to prepaid cards the same as traditional bank debit cards.

Under the EFTA, if you report your stolen or lost card within 2 days and someone has a chance to use it before your reporting, your responsibility is limited to $50.

If you report after 2 days but less than 60 days after the incident, your responsibility for unauthorized charges jumps to $500. After that, you may be out of luck.

Of course, card issuers can always offer better protections than the EFTA requires, but the EFTA sets the minimum that prepaid card (and other debit card) issuers have to abide by.

Prepaid Card Balances are Like Money in the Bank

If you’ve ever had a bank account, you probably know something about FDIC insurance. It’s the federal backstop that protects bank account holders if the bank fails.

And that same FDIC insurance applies to prepaid cards.

Just like with bank accounts, FDIC insurance covers your prepaid card balance–up to $250,000–even if the prepaid card issuer goes bankrupt. That’s because your card balance is ultimately held in a bank account. It’s just in a “pooled account” combined with other prepaid cardholders’ balances. But it’s tracked under your name and the money belongs to you. The FDIC says that’s good enough. You’re covered.

Virtually every prepaid card holds funds in this type of account that qualifies for FDIC insurance. If you’re not sure, just check your prepaid card’s terms and conditions. If it’s covered, the terms and conditions will say so.

There is one exception though–those prepaid cards that you pick up in the store. When you buy those temporary cards, your funds aren’t tracked to you. You have to register the card first. Until then, FDIC coverage won’t apply.

An Ounce of Prevention

So prepaid cards come with protections against fraudsters and even the card issuer’s financial calamity. Still, who wants to handle the problem in the first place? After all, your time is valuable and any losses will mean you’ll be without your money at least temporarily.

That’s reason enough to take some precautions to avoid the problem in the first place. Visa offers some good recommendations for steps you can take. Here are a couple of key takeaways.

Use unique, strong passwords for sites where you make purchases

Yeah, I can see the eye roll at this one. If you’re like me, you’re thinking there’s no way I can remember something that looks like 6Yi*!782u. Let me suggest you don’t try. Check out a password manager like LastPass. It generates secure passwords for you and stores them for later use.

When shopping online, check the site’s URL

Every online shopping site should have an https address. The “s” means it’s secure–it encrypts your data (like your card number) when it’s transmitted over the web.

Track your purchases in real-time

This has become super easy for most credit and prepaid cards. Card issuers offer mobile apps, text alerts, or both to let you know when a charge is made. All you need to do is use them. If you see something fishy, you can head it off at the pass.

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