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At-a-Glance Card 'Rulebook'

Prepaid CardsKey things you need to know

There are a variety of prepaid cards, including general-purpose reloadable prepaid cards, gift cards, payroll cards and government benefits cards. In 2012 and beyond, the…

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There are a variety of prepaid cards, including general-purpose reloadable prepaid cards, gift cards, payroll cards and government benefits cards.

In 2012 and beyond, the Consumer Financial Protection Bureau (CFPB), the federal bureau charged with protecting consumers who use financial services, will examine the prepaid market (as well as other “non-bank” financial services) to determine if greater financial protections for prepaid card users are needed.

Consumer protection organizations have called for extending debit card Regulation E and Electronic Funds Transfer Act legal protections to prepaid cards. These laws require error resolution rights and fraud protection by limiting losses from theft or loss to $50 if reported within two business days of learning of it and $500 when reported after two business days, but before 60 days from the statement date on which the unauthorized use was posted. Failing to report unauthorized use after that 60 day window has closed, means you could lose your chance to recover any part of the unauthorized usage.

General-purpose reloadable prepaid cards

General-purpose reloadable prepaid cards offer the same conveniences as paying with credit or debit but they’re missing the legal protections for error resolution and fraud liability that consumers expect when they pay with plastic. They are not subject to federal consumer protection laws for fraud and error resolution although financial institutions issuing the cards, and the payment networks that brand the cards (such as American Express, Discover, Visa and MasterCard) typically offer voluntary “zero liability” protections to make consumers whole in cases of fraud.

The sale of general-purpose reloadable cards is subject to the Federal Trade Commission (FTC) Act prohibiting unfair, deceptive or abusive practices. State UDAP (unfair deceptive acts and practices) statutes also apply.

Zero liability. General-purpose reloadable prepaid cards can be used two ways, by signing (signature) or by using a personal identification number (PIN-based). “Zero liability” usually does not apply on PIN-based transactions. At checkout, consumers are asked to choose between “credit” (signature) and “debit” (PIN-based). Choosing “credit” (signature) will preserve your “Zero liability” protections.

“Zero liability” extends just so far—it can be revoked if you report more than one or two incidents of unauthorized use in recent months. Read the terms on your card carefully to limit your liability for unauthorized use.

Keep a close eye on your card and statement. Time is of the essence in reporting lost or stolen cards or unauthorized use. Most card issuers state that if you report the loss or theft within two business days your liability is limited to $50, or even zero. After two business days consumers could be held liable for up to $500 in losses but if they wait longer than 60 after the unauthorized use is posted on their statements, in some cases, they can lose everything. (This is essentially the same protection afforded to debit cards users under Regulation E but for general purpose reloadable prepaid cards, this protection is voluntary, not law, and could be rescinded at any time.)

Government benefits cards

Federal, state and local government agencies favor electronic benefits payments because of their potential to reduce payment administration costs, deliver benefits faster than checks and reduce fraud and theft issues. By 2013, all Social Security, SSI and other federal benefits recipients will be required to receive their payments electronically.

These cards have Regulation E protections for lost or stolen cards, unauthorized use and error resolution. They are not allowed to charge monthly fees, but other fees are allowed, including fees for ATM and teller withdrawals, denied transactions, overdraft (spending more than you have on the card), balance inquiries, customer service, transfers, PIN-based purchases, bill payment and inactivity. (Many of these fees also are allowed on prepaid payroll cards.)

Prepaid payroll cards

An increasing number of employers are offering prepaid payroll cards instead of paper checks for employees that do not have a bank account to receive direct deposit. The cards can be a better option for unbanked consumers, as they can avoid check-cashing fees, have quicker access to their money, shop online and gain the ability to make purchases where MasterCard and Visa are accepted. If these consumers have been locked out of the banking system because of past mismanagement of a bank account, they still qualify for a prepaid payroll card.

Compared to gift and general-purpose reloadable prepaid cards, prepaid payroll cards have stronger consumer protections under state and federal government laws that protect employees. The cards come with FDIC insurance for up to $250,000 per employee account as well Regulation E consumer protections for fraud and addressing errors.