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Prepaid cards: Plastic that's less than fantastic

They're often loaded with fees but lack basic protections

Published: March 2012

Prepaid cards, more formally known as “general purpose reloadable cards,” are fast becoming a third alternative to traditional credit and debit cards. And because they usually bear familiar logos like Visa, MasterCard, or Discover, they are often indistinguishable from those other cards at first glance. But much of the similarity ends there.

Like a debit card, a prepaid card can generally be used to make purchases in stores and online, receive direct deposits, pay bills online, and obtain cash at an ATM. But prepaid cards don’t require you to have a bank account—you can buy them in stores or online. Unfortunately, the cards lack the guaranteed protections we take for granted with debit and credit cards, including what happens if your card is lost, stolen, or used for unauthorized transactions, or if the bank behind it fails.

What’s more, the cards are often loaded with fees, only a few of which might be disclosed at the point of sale. More detail can sometimes be found at the issuer’s website. Consumer Reports examined these fees in a report issued in March 2012.

Among the fees to compare if you’re considering a card:

  • Activation or initiation fees
  • Monthly fees
  • Point-of-sale transaction fees
  • Cash-withdrawal fees
  • Balance-inquiry fees
  • Fees to receive a paper statement
  • Fees to call customer service
  • Bill-payment fees
  • Fees to add, or “load,” funds
  • Dormancy fees for not using your card
  • Fees to get your remaining funds back when closing the account
  • Overdraft, or “shortage,” fees

Prepaid card users can take steps to avoid some fees, starting with understanding all the different ways you can be charged. Your costs will vary widely depending on which card you choose and how you use it, so make sure you understand those costs before selecting a card. With some cards, you might be able to reduce fees by using direct deposit to load money onto the card. And you can avoid non-network ATM charges by getting cash back when making purchases and checking your balance online or over the phone.

Bottom line: Given many prepaid cards’ multitude of fees and paucity of guaranteed protections, a regular debit card from a bank or credit union is likely to be a better deal if you can qualify for one.

   

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