IE 11 is not supported. For an optimal experience visit our site on another browser.

Can prepaid cards protect you from data breaches?

If the constant news of data breaches makes you nervous, it should.“Data breaches are the greatest risk factor for identity fraud,” warns Javelin Strategy and Research. And debit cardholders should be particularly worried because nearly half (46 percent) of consumers whose debit cards were breached in 2013 became fraud victims that same year, according to Javelin. If you use a debit card tie
ATM cards can be an alternative to debit cards.
ATM cards can be an alternative to debit cards.Gene J. Puskar / Today

If the constant news of data breaches makes you nervous, it should.

“Data breaches are the greatest risk factor for identity fraud,” warns Javelin Strategy and Research. And debit cardholders should be particularly worried because nearly half (46 percent) of consumers whose debit cards were breached in 2013 became fraud victims that same year, according to Javelin

ATM cards can be an alternative to debit cards.
ATM cards can be an alternative to debit cards.Gene J. Puskar / Today

If you use a debit card tied to your main checking account, think for a moment what will happen if that card is compromised and used by a thief. First, you would have to notice the unusual activity on your account, then notify your financial institution, fill out paperwork, cross your fingers and hope they are able to restore your funds quickly. (Here are other steps to take if you are a fraud victim.)

Getting the money back in your account could take a week or more. In the meantime, checks you’ve already written or bills set up on auto-pay may bounce and the companies you were supposed to pay may charge you non-sufficient funds (NSF) fees. Plus, what happens if the crook drains your account? Do you have access to other cash for day-to-day spending?

It may sound alarmist, but this is a very real scenario for fraud victims, and the best time to prepare for a situation like this is before it happens. A credit card is the safest alternative, but if you can’t or won’t get one, consider a Plan B: a prepaid card.

How It Works

Here’s the strategy: Dump your debit card and ask for a plain-vanilla ATM card so you can get cash when you need it. Then, get a prepaid card and have a portion of your paycheck set up to go onto the card via direct deposit. You don’t need to load your entire paycheck on it, just a portion that would cover some day-to-day spending. (Many employers will allow you to direct your paycheck into multiple accounts, or you can set up an automatic deposit from your checking account.) 

If you run out of spending money before the next deposit, you can transfer what you need from your checking to the prepaid card. Issuers often will make those transfers simple, but be sure to check.

As you may have already guessed, this strategy can also be helpful for sticking to a budget. You know how much spending money you have on the card, and when it’s gone, it’s gone.

What to Watch Out For

Prepaid cards are often criticized for their high fees, and that can be a real problem. After all, you don’t want to pay a lot of money just to use your own money. However, there are prepaid cards with low or no fees. Take the time to read and understand the schedule of fees before you get one of these cards.

The other thing you have to watch out for with these cards is your liability if the card is lost or stolen. Make sure you register your card if necessary, and understand exactly how to notify your issuer if the card is lost or stolen. Generally the liability limits for unauthorized transactions on your prepaid card are similar to those for a debit card issued by your financial institution. That’s why it can be helpful to use this card as a spending card, separate from your main checking account.

Regardless of the way you pay for purchases, one of the best ways to minimize hassles when it comes to fraud and identity theft is to catch it quickly. Setting up text or online alerts for your accounts is one way to do that. Another is to monitor your credit report and/or your credit scores regularly. You can get a truly free credit score updated monthly from Credit.com.

More from Credit.com:

Everything You Need to Know About Prepaid Cards   

How to Use Free Credit Monitoring

How to Get a Credit Card With Bad Credit

Gerri Detweiler is Credit.com's director of consumer education. She focuses on helping people understand their credit and debt, and writes about those issues, as well as financial legislation, budgeting, debt recovery and savings strategies. More by Gerri Detweiler