The Real Dangers and Risks of Prepaid Cards

credit cards

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In recent years, prepaid debit cards have emerged as a financial tool of choice for millions of people. But relying on these cards, which work much like a traditional debit card but aren’t linked to a bank account, can be risky, as thousands of RushCard customers discovered when they were recently locked out of their accounts.

The problems began on October 12, when many RushCard users realized they couldn’t access their accounts or that their balance was showing as $0, even when they knew funds should be available. The company, which is owned by hip-hop mogul Russell Simmons, blamed the problems on a technical glitch and promised a speedy resolution to the issue.

That didn’t happen. Some RushCard users were left high-and-dry for more than a week. Direct deposits of paychecks seemed to vanish into the ether and cards were declined at stores. Some who used RushCard as their primary banking tool were left unable to pay rent or buy food.

The angry and frustrated tweets say it all.

Rush Card wasn’t able to restore full functionality to its service until October 26 – 10 days after the problems first started.

“We can’t begin to express both how sorry we are for the pain that you’ve experienced and our commitment to make this right,” the company said in a statement posted on Facebook. It also announced it would waive all fees from November 1, 2015, through February 29, 2016.

That apology wasn’t enough for some angry customers, who demanded that they be reimbursed for late fees, extra interest, and other expenses incurred as a result of the debacle. A class action lawsuit has been filed against RushCard’s parent company, UniRush, and the Consumer Financial Protection Bureau (CFPB) is investigating.

Russell Simmons

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“I have personally spoken with UniRush CEO Rick Savard to make sure that action is being taken to address harm that has occurred,” said director Richard Cordray. “[T]he CFPB is prepared to use all appropriate tools at our disposal to help ensure that consumers obtain the relief that they deserve.”

The RushCard fiasco may bring new urgency to the CFPB’s efforts to regulate the prepaid debit card industry. Last year the agency announced that it was considering new rules that would offer prepaid card users many of the same benefits offered to users of checking accounts, like protection when a card is stolen or lost and error resolution rights.

Making sure that prepaid card users aren’t being taken advantage of has become all the more important as the cards have grown from a niche financial product to a mainstream alternative to traditional banks. Though prepaid cards can come with high fees and lack consumer protections (some aren’t even FDIC insured, though RushCard isn’t one of them), people are drawn to the convenience and perks. RushCard promises two-day advance access to direct deposits, for example. Others use them to control spending, since overdrafts typically aren’t allowed.

For those who can’t get a checking account or find traditional banking too expensive, prepaid cards are a financial lifeline. Those unbanked or underbanked consumers are RushCard’s target market. In the past, Simmons has touted the card as a tool of financial empowerment for those shut out of the mainstream financial system.

“I have watched with pride the way RushCard has changed the lives of hundreds of thousands of people giving them respect and dignity,” he told BET in 2009. “It gives underserved communities the tools to get their money right.”

swiping card

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For years, however, critics have been saying that prepaid cards aren’t as great as their issuers make them out to be. RushCard’s fee structure has been criticized, while others have slammed Simmons for his claims that the card would help people build credit.

“Russell Simmons has lied to the African-American community for years telling people that RushCard helps you build credit,” Ryan Mack, financial expert and contributor to Financial Juneteenth, told TheWrap. “This is a business of greed and exploitation of ignorance.”

Now, the company’s technical problems have exposed how vulnerable some prepaid card customers are if a card issuer screws up.

“The RushCard is an example of how a technical failure can turn prepaid cards into this century’s coal mine scrip,” Daniel Ray, editor-in-chief of CreditCards.com, told the Detroit News. “In the lightly regulated prepaid card industry, the card is only as good as the company that backs it.”

Follow Megan on Twitter @MeganE_CS

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