Prepaid debit cards booming, but beware

A new Consumer Reports analysis of prepaid cards has found that although fees are beginning to come down, they aren't always disclosed upfront. Moreover, prepaid cards offer weaker consumer protections than those provided by traditional debit cards linked to bank checking accounts.

Marketed as alternatives to credit cards and bank debit cards, prepaid cards appeal primarily to consumers who may not qualify for or feel comfortable using bank accounts or credit cards. Bearing familiar logos like Visa, MasterCard, or Discover, the cards can be used to make purchases in stores and online, receive direct deposits, pay bills online, and obtain cash at an ATM.

However, in an analysis issued today, Consumer Reports found that the cards lack the guaranteed protections we take for granted with debit and credit cards, including what happens if your card is lost or stolen or used for unauthorized transactions or if the bank behind it fails. What's more, prepaid cards are often loaded with fees, many of which aren't disclosed at the point of sale.

The analysis examined 16 major prepaid cards and found an array of fees, including the following:

• Activation or initiation fees: Nine of the 16 cards charged these, ranging from $3 to $14.95.

• Monthly fees: Thirteen of the 16 cards charged monthly fees of up to almost $10. Some prepaid cards will waive the monthly fee if the consumer makes a minimum direct deposit each month; others give consumers the option of choosing the monthly fee plan or a per transaction fee plan.

• Fee to get cash: Most of the cards charged a fee to withdraw cash from a domestic ATM, ranging from $2 to $2.50, not including the additional charge imposed by ATM operators.

• Fees to get a paper statement: Seven of the prepaid cards charge customers a fee, ranging from $1 to $5.95, to get a monthly paper statement detailing their transactions.

• Fees for customer service: These can vary, depending on how many calls a cardholder makes per month or if he or she sets up direct deposit. Some provide customer service for free, while others charge fees ranging from 50 cents to $2.99 per call.

• Inactivity fees: Five of the 16 cards charged fees when cards are dormant for a certain period of time, ranging from 90 days to 13 months.

See "Prepaid cards: Plastic That's Less Than Fantastic" for a full list of potential fees and advice on choosing a card, if you decide to. And see the full report, "Prepaid Cards: Loaded with Fees, Weak on Protections" [PDF] for specific information on the 16 cards we examined.