Prepaid debit cards can be costlier than you think.
They look like bank debit cards, and they’re typically co-branded with Visa or MasterCard logos. But prepaid debit cards have some key differences, such as weaker regulation and wide-ranging fees, to consider before ditching your regular bank card.
Prepaid debit cards survey
“This is a relatively new market,” says Lauren Saunders, managing attorney for the National Consumer Law Center in Washington, D.C. “And consumers are less protected than they think.”
Federal regulation is still being hammered out, but some prepaid debit card companies such as Green Dot are voluntarily displaying simple fee plans, says Suzanne Martindale, staff attorney for Yonkers, N.Y.-based Consumers Union. This information is crucial for consumers because card features vary widely.
Rachel Schneider, a vice president of innovation, research and policy at the Chicago-based Center for Financial Services Innovation, says prepaid debit cards have cleaned up their act since 2010 when the Kardashian card was pulled after its high fees drew scrutiny. Since those days, their fees have fallen slightly.
For example, Suze Orman’s The Approved Card carries a comparatively low monthly account maintenance fee of $3. And AARP has partnered with Green Dot to issue its own prepaid debit card, carrying a $5.95 monthly fee — but with direct deposit of $250 per month, the fee will be waived.
“And more prepaid cards are providing ways to waive monthly fees,” Schneider says.
Still, banks win the fee contest against prepaid cards. According to a 2011 Consumers Union survey, bank checking accounts are cheaper and offer more protections than most prepaid debit cards.
So, it’s worth noting five prepaid debit card gotchas before signing up.
1. Few fraud protections. If they’re lost or stolen, debit and credit cards typically limit your personal liability. But prepaid card users are only covered by issuers’ voluntary protections, Martindale says.
They also can reserve the right to change the terms of contract. “So, you’re at the mercy of customer service,” she says.
2. Sketchy Federal Deposit Insurance Corp. insurance. Some prepaid debit card companies such as Green Dot offer FDIC insurance on their cards, however, others do not. The bottom line: It pays to ask if your prepaid card account is insured by the FDIC.
For instance, the American Express prepaid card isn’t FDIC-insured because the funds are held by a holding company, not a bank, Martindale says.
3. Overdraft fees can be costly. Some prepaid debit cards offer overdraft protection that can sock consumers with high fees. These fees can negate a prepaid card’s main benefit — not spending more than you have, says Saunders. “Find a card that doesn’t have overdraft fees,” she says.
Also, monitor your spending by signing up for free text alerts, Saunders says. “And look at your online statements and transactions.”
4. It may be difficult to save money. Some prepaid cards offer online bill pay but no mechanism for saving money. For that reason, find a card that offers additional features such as a savings account. For example, the Mango prepaid debit card links up to a savings account with a 6 percent yield up to $5,000 with direct deposit. After that amount, the rate drops to 0.1 percent. “Use your prepaid card to save money, not just pay bills,” Schneider says.
5. Good prepaid card deals may not be that good. Prepaid cards usually don’t display fee schedules on their packaging, making card comparisons difficult, says Martindale. As a result, prepaid debit card fees can be hard to discern, and understanding their true fee schedule can be difficult.
There can be ATM fees, balance inquiry fees, monthly fees and even customer service fees. For example, Orman’s The Approved Card charges $2 to call customer service more than once a month. And reaching prepaid card customer service can be harder than a typical bank’s customer service, Martindale says.
“If you can’t find the fee schedule, that’s a bad sign,” Saunders says.
Opting for low or no monthly fees can help control costs. Many programs waive monthly fees when you sign up for direct deposit. For example, RushCard’s “Pay As You Go Plan” has no monthly fee, but it charges transaction and ATM fees.
Martindale says such plans can be costly over time. “If you use the card regularly, it’s better to pay a flat fee,” she says.
Martindale offers these final words of caution: Before getting a prepaid card, first exhaust your bank options.
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