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Prepaid cards will have you paying, all right

Image: Prepaid cards
Green Dot prepaid debit cards offer consumers the ability to avoid or limit fees that are sometimes associated with the products, according to a report from Consumers Union.AP

They’re the debit cards you can buy at a drugstore or supermarket and use wherever major credit cards are accepted, even online. You don’t need a bank account, since these cards are not linked to one (even though they have a Visa, MasterCard, Discover or American Express logo). There’s no minimum balance required. And best of all, no credit check.

Demand for these cards is growing explosively, as people use them to stick to a budget and avoid costly bank fees. But a prepaid debit card can be more costly than you think.

“Some of them are really nickel-and-diming you worse than the banks,” says Gail Hillebrand, a senior attorney at Consumers Union (publisher of Consumer Reports). “We found that you really had to poke around in the company websites to find all the fees. They’re not all listed on the packaging. And they vary quite widely from card to card.”

What’s it like to use a prepaid card? Associated Press business reporter Candice Choi wanted to find out.

She went to a check-cashing place in her neighborhood (on Manhattan’s West Side) and had her paycheck loaded onto a prepaid card. The store only had one choice, the NexisCard, which had the MasterCard logo on it.

Choi was charged at least a dollar every time she made a purchase. It was $1.50 if she used the PIN code to authorize the transaction. For cash back at the register she was dinged $1.99.

“You could really drain the value of the card very quickly especially if you are making lots of little transactions, which is what these cards are used for,” Choi says.

Another concern: Choi wasn’t given a cardholder agreement by the check-cashing store. She had to ask for one.

“If I wasn’t looking out for this, if I wasn’t a reporter writing a story about the fees, I would have just gone on using that card and racking up those transaction fees,” she says.

According to the Network Branded Prepaid Card Association, $18.3 billion was loaded on to prepaid cards in 2009. That figure is predicted to top $36 billion this year and double again in 2011.

Some people have few options other than these prepaid cards. For those who are college age and younger, the cards often serve as a substitute for a credit card. New federal regulations make it harder for anyone under 21 to get a credit card.

A long list of costly fees
Last month, Consumers Union released a report based on its review of 19 different prepaid cards.

It concluded that people who use these cards face “multiple fees and other costly ‘gotchas’ that can quickly eat away their value.”

Here are some of the fees Consumers Union found:

  • Activation Fee: You may have to pay between $3 and $20 to have the card turned on. The First Vineyard card charges a whopping $39.95 activation fee.
  • Monthly Fee: This could be as low as $2.95 or as high as $9.95. In most cases, that monthly fee is waived if you set up an automatic direct deposit. The popular Green Dot card won’t charge its $5.95 a month fee if you load $1,000 on to the card that month or use it 30 times.
  • Cash Withdrawal Fee: You can use these cards to get cash from ATMs, but in most cases you’ll pay for each withdrawal, anywhere from a dollar to $2.50. The Rush card gives customers two free cash withdrawals before the $2.50 fee kicks in. The Green Dot card does not charge a fee if you use an ATM in its network.
  • Balance Inquiry Fee: Expect to be charged between 45-cents and $1 to find out how much money you have left on the card.
  • Customer Service: With most cards you can talk to a customer service agent for free. But if you have the BuyRight card you’ll pay $1. The Exact card charges $3.95 for calling customer service.
  • Non-use Fee: Some prepaid cards hit you with a dormancy fee if the card is not used for a certain period of time. After 90 days of inactivity the Exact card charges a monthly fee of $9.95. Consumers Union’s Hillebrand calls that “pretty outrageous.”

Some other downsides
Federal regulations spell out specific safeguards if a traditional debit card is lost or stolen and used fraudulently. If you report the problem to the bank within two business days, your liability is limited to $50. Consumer advocates point out there is no such federal protection for prepaid debit cards, although the credit card companies all promise “zero liability” protection.

“While there is voluntary fraud protection from the credit card companies, you must register the card prior to the loss,” says Gerri Detweiler, personal financial advisor with

Kirsten Trusko, president of the National Branded Prepaid Card Association, says cardholders have nothing to worry about.

“These are bank-issued products,” she says. “If your card is lost or stolen it’s replaced. If somebody uses it fraudulently, you can dispute that. It’s just like you or I with our own bank account.”

But Consumers Union insists they are not the same. Visa’s zero-liability policy does not cover you if the thief uses your prepaid card at an ATM. MasterCard’s policy does not cover gross negligence.

Federal law for regular debit cards does not have such exceptions.

Something else to consider: because this is a debit card, not a credit card, you don’t build a credit history. If that’s your goal, you’d be better off with a secured credit card from a bank or credit union.

The bottom line
According to the FDIC, 17 million American adults do not have a bank account.

For them these prepaid debit cards are a godsend. They’re cheaper and more convenient than constantly using a check-cashing service.

Before you choose a card, shop around. The best way is to go online and compare the price to buy the card and to use it. Some cards are significantly better than others.

Here’s one more option, suggested by Chris Lombardo at Clearpoint Credit Counseling Solutions in Seattle. If you’d like to have a bank account but have had difficulties in the past, see if any banks or credit unions in your area have a “second chance” program. Hopefully, you can find a financial institution that offers these low-cost or no cost checking accounts. That would be your best option.