$45 million theft highlights the risks

The Hazards of Prepaid Cards

by Bill Hardekopf

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As the use of prepaid debit cards increases, so does the risk of theft and fraud. Federal prosecutors charged eight individuals in New York with cyber-attacks on the global financial system. They were part of an international cyber ring that hacked into a database of prepaid debit cards and stole $45 million from ATMs around the world.

Prepaid cards have fewer protections and regulations than credit and debit cards issued by a bank. They do not provide information about credit history or individual behavior, which makes them a good option for people with bad credit or no bank account but also for thieves and crime rings.


Most prepaid cards are covered up to $250,000 in FDIC insurance, but not all. The card issuer can choose whether to offer the insurance and how to offer it. American Express, Discover, Visa and MasterCard usually offer "zero liability" protection for fraud. However, "zero liability" does not apply to all transactions. Visa's zero liability policy applies to U.S.-issued cards. It does not apply to PIN transactions that are not processed by Visa. MasterCard's zero liability does not apply if the card is issued or sold "anonymously" (for example, a prepaid card purchased in a store), until the identity of the cardholder has been registered with the financial institution that issued the card, or if a PIN is used for the unauthorized purchase.

Networks that process prepaid card transactions do require prepaid card issuers to provide contractual protections to cardholders, but those protections are not as strong as those for debit and credit cards and they are subject to change at any time.

Prepaid cards can offer some of the same theft and loss protections as a credit card. If you quickly report the loss or theft of a registered card to the issuer, most will restore your original balance and issue a new card.

Tips for Using a Prepaid Card

  • Shop around for the best card for you. Compare the features, benefits, and fees to find the card that best suits your needs and budget.

  • Read the card or packaging before you buy the card. Read the fine print on the packaging or online to know what you are buying in advance. Pay attention to fees, protections, and the expiration date.

  • Keep the card number and customer service information in a safe place.

  • Report losses or unauthorized purchases immediately. Many times the card will be reissued and the funds replaced if you report problems in time.

  • Know your card balance so you won't be caught with a purchase that you can't pay for.

  • Track your spending regularly. Register your card through the issuer's website and you can monitor your spending activity online.

If you don't feel comfortable with a prepaid debit card, there other options besides a credit card. A debit card tied to a checking account is usually less expensive than a prepaid card. A secured card may also be less costly and some secured cards will help you build your credit score if you have a good payment history.

Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card.

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