5 Things You Need to Know About Prepaid Cards

Prepaid cards have gained popularity. According to the Consumer Financial Protection Bureau, in 2012, prepaid cards had $65 billion uploaded on them; by 2018, that amount is expected to spike to $112 billion.

It's easy to understand their appeal. Younger people like prepaid cards because they see it as cheaper than having a high-interest credit card or a checking account, which comes with maintenance costs and potential overdraft fees.

[See: Best Credit Cards: Find the Right Card for You.]

Banks love prepaid cards because they're less expensive to maintain than a traditional bank account, the associated fees can generate additional revenue and until recently, they haven't been heavily regulated.

The lack of regulation will change in about a year. The CFPB just announced new rules for prepaid cards that will begin in Oct. 2017. If you're trying to make sense of it all, here's a roundup of some of the changes coming down the pike for prepaid cards.

More transparency. Starting Oct. 1, 2017, consumers will be given more paperwork in easy-to-understand language with disclosures spelled out, including relevant fees.

That would be a major improvement over the current system, says Stephen Lesavich, a Kenosha, Wisconsin-based attorney and author of "The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards."

"Under current regulations, many consumers lost the money they placed on the prepaid cards over time because they were not aware of the charges and fees," Lesavich says.

[See: 25 Fast Financial Fixes.]

Better protection if your money is lost or stolen. If your wallet is stolen with a $1,000 prepaid card inside, starting in Oct. 2017, you'll be able to get most of it back. No matter how much is stolen, the most you'll be on the hook for is $50 (as long as you report the card stolen or lost within two business days). That puts a prepaid card on par with a credit or debit card, but it isn't enough for some industry watchdogs.

Andrea Luquetta, director of policy and research at the California Reinvestment Coalition, a nonprofit that advocates for fair and equal access to credit, says that all of these rules are "a good start" but points out that prepaid card issuers won't be required to have FDIC insurance. So if you upload $1,000 onto a prepaid card and the next day the company goes out of business, you're out of luck.

Better overdraft protection. Most prepaid cards don't allow you to spend more than you have. That's one of their biggest draws. Many users like knowing that they won't accidentally spend more than they have and be charged an overdraft fee. The problem is, some prepaid cards do allow consumers to spend more than they have, which takes their prepaid cards into negative numbers.

Critics say that letting consumers go into overdraft with a prepaid card is akin to giving them high-interest payday loans; supporters say that it allows consumers to have a short-term, albeit expensive, loan, which could be helpful if you're in a financial jam.

In any case, the CFPB is limiting how deeply you can go into overdraft. For the first year of having a prepaid card, the total cost of going into overdraft can't exceed 25 percent of your card's credit limit. So if you're allowed to go $100 into overdraft, you won't get more than $25 in overdraft fees.

Fewer fees. Not all prepaid cards have these fees, but you could choose a prepaid card that has an activation fee, a point of sale fee, a customer service fee, an inactivity fee, ATM fees, upload fees, card replacement fees, online bill pay fees ...

Next fall, when the regulations kick in, prepaid card companies will be required to send you a monthly statement similar to what you receive for having a credit card or checking account. Smart users will review their statements regularly to ensure they aren't being consistently hit with perplexing charges, like a point of sale fee, which means you're being charged for using the card to buy something.

And if your prepaid card has gone into overdraft, you'll be given 21 days to pay back your debt, allowing you to hopefully avoid yet another fee -- a late fee. Some cards give consumers a grace period of one day.

[See: 10 Easy Ways to Pay Off Debt.]

Fewer opportunities to be in a debt trap. Many people get prepaid cards to avoid going into debt. But as Lesavich says, that hasn't been the case for everyone. Some people have stumbled into those overdraft traps with their prepaid card, and because they couldn't pay the card back in time, would accrue more fees; ultimately the money they owed the prepaid card would be reported to their credit bureau, dinging their credit score. All from having a prepaid card.

But the new rules will make it harder for that to happen. For one, prepaid companies will be required to make sure consumers have the ability to pay any debt before offering the ability to spend more than they have on the card. Companies also won't be allowed to issue this credit feature on a prepaid card until a cardholder has had the account for 30 days. The idea? Consumers will get some experience using the card first.

Another helpful change will be the ability to fight back when you think your issuer is being unfair, Lesavich says.

"In the past, dispute resolution for duplicate charges and fraudulent charges on a prepaid card was difficult for a consumer," Lesavich says. "Under the new rules, prepaid card issuers must cooperate with customers to investigate or resolve dispute incidents in a timely manner. If the dispute process can't be completed within 10 business days, the card issuer will be required to temporarily credit the disputed amount to the consumer's card."

None of this means it'll be impossible to get into trouble using a prepaid card. But prepaid cards are often marketed as a helpful tool to avoid getting in debt. In a year, they may actually live up to that promise.