Consumers Union, publisher of Consumer Reports, offers this guest post on the dangers of prepaid cards:
"While prepaid cards are becoming an increasingly popular alternative to check cashers and traditional bank accounts, a new Consumers Union report finds that the cards come with high fees and don’t offer consumers the same kinds of protections as other forms of plastic payment.
Prepaid cards are reloadable cards that can be used to make payments similar to debit cards and are becoming the foundation of a second tier banking system used by a growing number of low income consumers.
Here's a link to the full report about prepaid cards.
“Consumers using prepaid cards end up paying a mountain of costly fees that can add up quickly and undermine their finances,” said Michelle Jun, staff attorney for Consumers Union. “Prepaid cards are being marketed aggressively, so it’s important for consumers to understand the hidden costs and how these cards might leave them vulnerable if lost or stolen.”
Prepaid cards are a growing business and usually bear a network logo such as Visa or MasterCard and often have the word “debit” printed prominently on the front of the cards. The Federal Reserve estimated that 312 million transactions were made with pre-paid cards in 2006 for a total value of $13.3 billion.
Consumers Union reviewed the terms and conditions of 18 different prepaid cards and found that consumers face multiple fees and other costly “gotchas’:
Activation Fees: 17 of the 18 pre-paid card issuers reviewed charged consumers a fee for activating their cards. These activation fees ranged from a low of $3 for the Walmart Money Card to a whopping $99.95 to apply for and initiate the Millenium Advantage card.
Monthly Fee: 15 of the 18 pre-paid card issuers charged monthly fees ranging from $2.95 per month for the FinanSe card to $10 per month for the Rush Card. Most pre-paid card issuers will waive the monthly fee if a direct deposit is set up. Some card issuers will waive the monthly fee if the consumer chooses the “pay as you go” option.
Fees to Get Cash: All 18 card issuers reviewed charged fees for withdrawing cash from ATMs in the U.S. On the low end, the FinanSe, SVC Revel, and Espree cards charge $1.50 per withdrawal. The NetSpend Visa card charged the highest fee – up to $2.50 for each withdrawal. Charges are usually even higher for international withdrawals.
Balance Inquiry and Statement Fees: 17 of the 18 card issuers charged fees for checking balances at ATMs, ranging from 50 cents to $1. This does not include any additional fee charged by the ATM owner.
Customer Service: Most pre-paid card issuers provide free customer service, but consumers using the Millenium Advantage card will be charged $1 per minute when they call customer service, while users of the Espree card will pay $3 for each customer service call. Some pre-paid card issuers charge customer service fees after a limited number of free calls.
Fees for Inactivity: Eight of the 18 card issuers charged fees when cards are not used after a certain period of time. These dormancy fees range from $1.95 per month for the Rush Card (after 90 days of inactivity) to $9.95 per month for the Exact card.
Overdraft Fees: A number of prepaid card issuers claim that they do not charge fees when users spend more than the available amount on their cards. However, Consumers Union found that 10 of the 18 cards it reviewed included overdraft or “shortage” fees. These range from $24.90 charged by Espree for overdrafts to $29 charged by Eufora and AccountNow.
Routine use of prepaid cards can result in significant costs for consumers as all these fees add up. For example, Consumers Union found that a consumer using the Rush Card’s pay as you go program who made three ATM withdrawals, three bill payments, eight point of sale purchases and two deposits would be charged $43.75 for the first month in fees.
When prepaid cards are lost or stolen and used by others to make fraudulent transactions, consumers are not protected by the same regulatory and statutory safeguards that enable other debit card users to recover their money. If a consumer contacts a card issuer about a lost or stolen debit card within two business days, the consumer’s liability is limited to up to $50 (or up to $500 if the consumer reports the debit card lost or stolen after two business days). By contrast, prepaid cards may only have voluntary protections that could be revised or rescinded at any time for any reason.
Some prepaid cards claim to provide consumers a way to build a credit record or include a credit line feature. However, Consumers Union found that the prepaid card issuers may report “credit building” activity to an alternative, less used credit reporting agency or may report only the payment of the card’s high monthly fees. The credit line feature may provide credit which is as expensive as costly overdraft loans and payday loans.
Finally, consumers with traditional bank accounts have peace of mind that their money will not be lost as long as their bank is FDIC insured. But consumers who use prepaid cards have no guarantee that they will be able to recover all their money in the event of a bank failure because the funds may not be insured by the FDIC. "
--Source: Consumers Union