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 are much simpler than opening a bank account; you simply buy them in a store or online.
And there's good news for prepaid cards users: Competition and regulatory scrutiny have driven down fees, and the Consumer Financial Protection Bureau is expected to issue preliminary rules covering prepaid cards in late 2014.
Although all but one of almost two dozen prepaid cards we've examined voluntarily provide customers with deposit insurance and protections that mirror those afforded to debit card holders under the Electronic Fund Transfer Act, these voluntary protections can be withdrawn or changed anytime and they're no substitute for strong federal regulations. Consumers Union, the advocacy arm of Consumer Reports, has long advocated that all payment cards--credit, debit, and prepaid cards--should come with the same mandatory protections.
Unfortunately, there's some bad news, too: The terms and conditions that govern the fees and your rights and responsibilities in using these cards can differ dramatically among providers, and fees and charges are sometimes hard to find in the small print if they are there at all.
One obstacle to easy comparison shopping is the lack of standard terms to describe common fees. For example, take the fees associated with opening an account: On the landing page for the Chase Liquid prepaid card, the site advertises "$0 Fee to Open" while the RushCard has a "Get Started OneTime Card Fee" of $3.95 -$9.95" and the U.S. Bank Contour Card charges a $4.00 "Enrollment Fee."
Another problem: Consumers may find it difficult to quantify monthly fees because not all the fees that they may incur in using a prepaid card are charged by the prepaid card program manager. Reloading fees are an example. Most prepaid cards can be reloaded (meaning value is added to a prepaid card) in a variety of ways, and few prepaid card issuers themselves charge cardholders a fee to load.
However, third-party reload fees charged by retailers, for example, are very common. This leaves consumers without essential information, making it difficult to calculate what it will cost to use a prepaid card before they buy one.
Among the fees to compare if you're considering a prepaid 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