The Credit-Debit-Prepaid Card Message is Getting Messier – Part I

I was in a meeting last week with colleagues from the financial services arena. Each of them told a story about a family member or friend who recently ran into the nasty overdraft fee business from their financial institutions that are beginning to get some media attention.

During one of the stories, the individual mentioned that the person opened a separate debit card for cash purchases during the week such as gas, coffee, etc. I stopped her and asked whether in fact the person opened a checking account with a debit card attached or was he actually transferring money to a pre-paid account. The answer: it was a checking account and he transfers money each week for these “cash” transactions. He is actually budgeting his money by managing his spending.

The story went on to describe that at one particular convenience store, the store placed a $75 hold on the debit transaction of $3.50 (coffee and a bagel). This hold essentially placed the checking account in an overdraft situation and every small purchase after that racked up a $35 overdraft fee – a total of over $150 in fees!

Should he have used a pre-paid, re-loadable card instead? Maybe, but many of those have a slew of fees as well and they don’t carry the fraud protection of debit & credit cards.

Some of the large banks are now offering the customer the option to opt out of the automatic overdraft feature in order to avoid the fees that are getting so much attention. So in this case, that would mean that after the $75 hold was placed, every subsequent transaction would be rejected at the merchant. Like that one better?

The point is, we have to know more about the rules of plastic more than ever – and we have to help our kids understand the differences. The trouble is – we can’t even use the same semantics! Remember that in telling the story, my colleague said the person opened a “debit card.” I just recently received a $30 rebate from Staples from an item I ordered during the summer. The rebate came in the form of a pre-paid card with the words, “Debit” right on the front of it. And we expect kids to keep it straight?

Here’s a great article from Liz Pulliam on pre-paid cards and their fees.