Stored Value Cards

A few days ago, a summer intern in our office mentioned that her pay from another part-time job she has, came in the form of a stored value card. For each pay period, her employer loaded the funds onto the card. She said that she can use the card to make purchases from most retailers. But while she is not charged a fee for using it at some retailers she is charged at others. So why would anyone want to have to pay someone to take their money? How do stored value cards, also known as prepaid cards, work? Are there ways to avoid the fees or at least control the costs of using it? What is a stored value card? Stored value cards come in many different forms and can serve a variety of purposes. Anyone who makes purchases with a retailer gift card, places phone calls with a prepaid telephone card, or buys goods or services with a prepaid debit card is using a stored value card. Payroll cards and government benefit cards are other examples. The magnetic strip on the card stores information about the funds available to the card. There are two basic types of stored value cards. The first type is the prepaid or closed system card, a single purpose card such as gift card that can be used only at a particular retailer. The second type of card is a multi-purpose or open system card that can be used to make debit transactions at many different retailers as well as for receiving direct deposits from an employer, and making ATM withdrawals. Some multi-purpose cards may carry the VISA or MasterCard logo and can be use any place there Visa or MasterCard credit cards are accepted. A stored value card does not extend a line of credit, but bears a closer resemblance to a debit card. The debit card, however, is tied to an account typically at a bank or credit union whereas the stored value card is not. Where do you get them? They can be obtained as a payroll card from an employer, an electronic benefit card from a government agency, or a gift card from a retail store. A multipurpose card can be applied for by telephone, online, or at check cashing outlets, money transfer company locations, and retail stores. Are there costs to using a stored value card? There are several types of fees that may be associated with the use of a stored value card. It’s important to know what these fees are to weigh the benefits of using a stored value card compared to the use of other financial services such as a checking account, credit or debit card. Generally, if the card has a high fee of one variety, it will likely have a low or no fee in another. You need to anticipate how you plan to use the card to evaluate if the card will meet your needs. Typical fees include an entrance or activation fee, a monthly or annual maintenance fee, a point of sale fee, and a within network ATM transaction fee. In addition, there could be several other fees such as a reload fee, a phone or online transaction fee, a bill payment fee, an inactivity fee, a transaction limit fee, or an overdraft fee or overdraft protection fee. In other words, you could incur a fee for putting money into your card and again when you use the card at a retailer. All of these fees can add up to a significant sum if the user is not aware of them or careful in using the card. Who uses prepaid cards? Reloadable multi-purpose cards can be an alternative to a checking account for those who do not have a bank account or are unable to open one. An employer can direct deposit the paycheck to the account or funds can be added by money wire transfer, money order, or cash. They are also used by people who don’t qualify for a credit card. No credit check is required to obtain a prepaid card. The prepaid or stored value card can be a way for parents to give a cash allowance to their teenagers while monitoring their spending habits. It can be reloaded online or over the phone. If you’re trying to rebuild your credit history after a bankruptcy, a prepaid card can be a start. Some companies offer programs that help build a positive payment history, since the timely payment of bills constitutes 35 percent of your credit score. Is your money safe? Your savings in a bank is insured by the Federal Deposit Insurance Corporation (FDIC). The same is now true for stored value cards to the extent that the funds have been placed at an insured depository institution. Gift cards issued by a retailer are not covered. If the retailer goes bankrupt (think Circuit City or Linens ‘n Things, for example), there is no guarantee of the funds on the stored value card. Some states may offer some protections or the retailer may ask the bankruptcy court to honor the cards. As with any financial product or service, the consumer needs to be informed to make the best decision as to whether it will meet his/her needs at a reasonable cost.

Myth: If I use my debit card, I can't overdraw my account

Many people are under the mistaken belief that if they use their debit card for a purchase, they can’t overdraw their account. More and more people, however, are finding out the hard way that this isn’t really the case. So how can this happen? Prior to 2003, most banks would not accept a debit card purchase or ATM transaction if there were insufficient funds. Since then many banks have begun allowing the overdrafts without alerting customers and then charging a fee averaging more than $30. According to the Center for Responsible Lending, a consumer advocacy group, consumers are paying $17.5 billion in overdraft fees annually, of which nearly half is the result of a debit card transaction or ATM withdrawal. One way the overdraft can occur is because the merchant has placed on a hold on the funds in your account. Typically, this will be at a gas station, restaurant, auto rental or other places where the exact amount of the purchase is not known at the time the card is swiped. Although practices vary, gas stations, for instance, may place a $75 hold on the card since they don’t know if you’re filling the gas can for the lawn mower or the tank on your motor home. It may take as long as 72 hours for them to release the hold. In the meantime, you made additional transactions expecting that your full balance was still available to you. Because of the hold, or possibly several holds, a portion of your funds was not available causing an overdraft and the accompanying fees. These holds can be avoided by using a PIN (personal identification number) transaction as opposed to a signature transaction. Both are still a debit transaction even though you may have been asked when presenting your debit card whether you want “debit” or “credit”. The “debit” or PIN transaction will be processed immediately whereas for a “credit” or signature transaction, a hold will be placed on the account. A second issue is that not all transactions are reported immediately. Some merchants batch process the day’s transactions rather than each individual transaction. If this is the case, when you checked your balance after the purchase, it did not reflect the actual amount of funds available.