Are Prepaid Debit Cards Safe?

Prepaid debit cards allow you to limit your spending, but may have some hidden risks, like FACTA violations. Let’s explore the pros and cons.

What Are Prepaid Debit Cards?

A prepaid debit card is a bank card that only has money available if you load money onto it. The prepaid debit card is like a gift card because it has a finite amount of money and can be reloaded with more funds. The difference is a gift card is normally good for only one store or restaurant, but a reloadable debit card can be used anywhere that makes use of its payment network, which oftentimes is either Mastercard or Visa.

Nerdwallet explains that when you activate a prepaid debit card and load money onto it, you are actually opening a transaction account held by the bank that issued the card. However, it’s important to keep in mind that having and using one of these cards will not affect your credit score, so while it will not hurt your credit reputation, it won’t help it either.

Are There Any Prepaid Debit Card Dangers?

Unfortunately, there are a few. Even though it’s a great way to budget your money because you can only spend what you’ve loaded to the card, most prepaid cards involve fee schedules that can add up quickly.

For example, the American Express Serve Cash Back prepaid card allows consumers to earn 1% cash back each time the card is uses, but the card has a $7.95 monthly fee, according to The Balance. The initial purchase price of the card is $3.95, and you’re charged another $3.95 for each cash reload. If you use it at any ATM other than MoneyPass ATMs, you’ll incur a $2.50 ATM fee.

Another point to consider is that when you use a debit card linked to your checking account, the funds are federally insured if the bank goes out of business. If the bank that issues the reloadable debit card fails, that card will not be covered by the FDIC, which means you may be out that money.

It’s also more difficult to dispute a charge made on a reloadable debit card. According to Nerdwallet, most prepaid debit cards insist that consumers address questioned charges through binding arbitration.

If a prepaid card is lost or stolen and subsequently used by someone else, you might not have any recourse. While some prepaid debit cards protect you against fraudulent activity, many do not.

Securing a Prepaid Debit Card

Prepaid debit and credit cards can seem like a good option for those who do not want a regular bank card, but also don’t want to carry cash. Parents can use them to help teach their teens about money and they can also help those without bank accounts or with less than stellar credit. In addition, people like to use them to give gifts as a more secure option than cash. However, experts warned CNBC personal finance reporters that prepaid cards come with greater risks.

Prepaid cards have less protection under the law than regular cards, they told reporters, making it more likely that a consumer will lose the money on the card. Consumers, say experts, shouldn’t put any more money on the card then they would be prepared to lose.

Experts also say that prepaid cards make it easier for fraudsters and money launderers to do their work. On the flip side, other experts say that, as long as consumers are careful, they can be a good option.

“I don’t see a risk for consumers who want to use prepaid debit cards as long as you follow normal security procedures,” one security expert told CNBC. “It’s a great tool for the honest consumer.”

According to CNBC, there are a few security procedures that consumers should take if using a prepaid card, including using a secure PIN and securing the card itself to avoid theft. In addition, consumers should be aware of the terms of the cards and if any fees apply.

Also, be sure to check receipts to ensure that more information wasn’t included then permitted under federal law and be sure to dispose of receipts and the card securely.

Can You Get Scammed with a Prepaid Debit Card?

You can be scammed with these cards, warns Creditcards.com, which says fraudsters may pretend to be legitimate creditors asking you to buy a prepaid card. In other cases, someone posing as one of your monthly billing companies, such as your power company, may call and ask for a payment through a prepaid debit card. When you provide the information, you think you’ve paid your bill, but you have really provided the scam artist with free money.

Scammers also might pose as IRS employees and request immediate payment of taxes. Thousands of consumers have coughed up more than $1 million to IRS imposters.

Another type of IRS scam involves a criminal filing a fake tax return using a victim’s name and Social Security number to ask the IRS to issue the refund through the use of a prepaid card. In that instance, the scammer had to retrieve the victim’s personal identifying information through the dark web or through some other nefarious means.

And in yet another fraud, ransomware may be used to force consumers using their computers to pay an amount through a prepaid card in order to have access to their hard drives once again.

In mid-August, more than a dozen people were arrested for allegedly stealing money from Santander Bank ATM machines through the use of prepaid debit cards in New Jersey, New York and Connecticut. At least one suspect who was captured was armed, and the FBI joined detectives from local law enforcement agencies to take several suspects into custody.

Is There a Risk of Prepaid Card Identity Theft?

As with any debit or credit card transaction, you should keep an eye on your receipts. The Fair and Accurate Credit Transaction Act (FACTA) protects you from identity theft by limiting the information that can appear on your copy of the receipt.

No more than the last 5 digits of the card number should be visible on an electronically printed receipt, and it should never indicate the card expiration date. Under FACTA, all electronically printed receipts must comply with these guidelines. This includes kiosk receipts and others, though handwritten receipts or documentation from manual imprinters does not require the same measures.

Receipts can comply with FACTA through a process called truncation. Through truncation, digits of a card number are replaced with a symbol such as # or *. This censoring of information not only complies with FACTA but also protects sensitive information.

For example, with a credit card number of 0000 0000 0000 1234, a properly truncated receipt would read: **** **** ***0 1234. Similarly, an expiration date of 10/20 would be truncated to read: **/**.

Although it is easy to grasp that no expiration date information is allowed on receipts, the exact application of FACTA to card numbers can be more difficult to understand. Some examples of improper card number truncation include:

• 1111 22** **** 4444
• 1111 **** **** 4444
• **** **** ** 444444

Although these examples may not seem remarkable, failing to properly truncate a receipt can lead to serious consequences. Through truncation, it is much more difficult for a criminal to obtain sensitive payment card information through hacking or even stealing physical receipts.

By stealing sensitive information, criminals can pose as real consumers and make illicit purchases without their authorization. If other information is stolen along with this data, criminal identity theft can have crippling consequences for consumers’ social security numbers and credit score.

Due to the consequences of identity theft, businesses are required to follow FACTA regulations to the letter. If companies fail to follow these guidelines, they may be hit with a class action lawsuit.

How Can You File a FACTA Class Action Lawsuit?

If your prepaid card receipt shows more than the last five digits of the card number and/or the expiration date, you could be eligible to file a FACTA class action lawsuit.

Consumers have successfully sought damages for becoming victims of identity theft by filing suit against retailers who are not compliant with FACTA laws. Any willful noncompliance may cost the business damages between $100 and $1,000 per consumer, plus punitive damages.

Join a Free Credit Card Receipt Class Action Lawsuit Investigation

If you have a receipt, invoice or contract from a retailer or vendor that includes more than the last five digits of your credit card or debit card number or any portion of the expiration date, you may qualify to file a credit card receipt class action lawsuit.

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This article is not legal advice. It is presented 
for informational purposes only.