By Eileen Ambrose, The Baltimore Sun
1:45 PM EST, January 21, 2011
Hip-hop mogul Russell Simmons is hawking a prepaid card. Reality TV star Kim Kardashian briefly offered a prepaid card before it was pulled off the market. Then earlier this month, the Treasury Department announced that it would allow some taxpayers to get their refunds on prepaid cards this year.
Clearly, not all prepaid cards are created equal. Determining if you need a prepaid card — and which one would be right for you — means reading the fine print on all kinds of fees and services. Be prepared; it's not always easy.
Prepaid debit cards have been around for about 15 years, but the market is seeing exponential growth. They are convenient and easy to use — you load money onto the card and then can use it anywhere a debit card is accepted — but you pay a price for that.
The cards are often touted as an alternative plastic for the 43 million consumers who have little or no banking relationship, either because they don't trust banks, don't have easy access to one or have a history of bounced checks that prevents them from qualifying for an account. Federal and state governments now use prepaid cards to pay some benefits, while some employers have adopted them in lieu of paychecks.
But much of the growth in the future is expected to come from general-purpose reloadable cards purchased by consumers, such as the Walmart MoneyCard, Green Dot and Simmons' RushCard.
In 2007, consumers loaded $12 billion on these cards and are projected to add nearly $202 billion onto the plastic in 2013, according to Mercator Advisory Group, which tracks the cards. The total market for cards that can be reloaded is expected to exceed $420 billion in three years.
Industry experts say prepaid cards are increasingly appealing to a broader audience that uses them for budgeting. Consumers put only the amount on the card that they want to spend.
"They are going up-market now," says Brent Watters, a senior analyst with Mercator, noting that households with six-figure incomes are buying prepaid cards.
One of the latest prepaid cards is the Treasury Department's pilot program to deliver tax refunds on plastic. The government is asking 600,000 low- to-moderate income taxpayers to sign up for the MyAccountCard, which will allow them to get refunds faster than with a paper check.
The pilot will test different fee structures, although any charges would still be less than what you get with most prepaid cards that you can buy. Some tax filers will also be offered an interest-bearing bank account.
This is a good move by Uncle Sam. It will help some filers avoid check-cashing fees and may prevent others from taking out pricey refund anticipation loans to get refunds more quickly.
But consumers beware — some prepaid cards come with serious drawbacks.
Many don't have the same regulatory protections as a debit card, consumer advocates say. Report a stolen debit card within a certain period, for example, and your losses from unauthorized transactions are capped. (Government and payroll prepaid cards do have those mandated protections.)
But the Network Branded Prepaid Card Association, made up of major players, says its members offer similar protections.
Prepaid cards can also carry hefty and numerous fees. Legislation was introduced in Congress late last year to ban fees for inactivity, customer service and balance inquiries, and to protect funds loaded on a card in case it's stolen or the company selling it goes bankrupt.
A Consumers Union report last fall found more than half of 19 cards surveyed carried activation fees ranging from $3 to $39.95. Most assessed monthly fees from $2.95 to $9.95; half included an inactivity fee, and all charged for ATM withdrawals. Some cards listed a "shortage" fee that would be triggered if you spend more than the amount on the card.
Even though competition has intensified, that hasn't brought down fees or led to any standardization, says Suzanne Martindale, associate policy analyst with Consumers Union. "The fees still vary so widely from card to card," she says.
The poster child of fees-gone-wild is the now-defunct Kardashian Kard, introduced in November and targeted at teens. Outcry over the fees was swift and intense. The Kard charged an upfront fee of $99.95 for the first year, and $7.95 a month thereafter. It was loaded with many other fees — including one for cancelling the card.
The Kardashian sisters quickly terminated their endorsement after just three weeks and have been sued for breaking their contract.
The Kardashian Kard isn't representative of the industry, says Chrystal Wright, a spokeswoman for the Network Branded Prepaid Card Association. "There are much better values out there for consumers than that product," Wright says. "The consumer spoke. It didn't appear they had a lot of people chomping at the bit for that card."
Wright adds that consumers can use many of the prepaid cards "almost fee-free." For example, monthly fees are often waived if you directly deposit wages onto a card or maintain a higher balance, she says. ATM fees can be avoided by using machines within a network. And balance updates are often free if you sign up for text alerts.
While the Kardashian Kard and other celebrity-endorsed prepaid cards are no longer on the market, Russell Simmons' RushCard card has had staying power. It also has some of the higher fees among cards in the Consumers Union survey.
But RushCard president Ram Palaniappan says every year since the card was introduced in 2003 it has added services and lowered fees. Most recently, the RushCard eliminated a $19.95 activation fee and reduced the cost of a replacement card from $9.95 to $3.95.
The card also offers online tools to help consumers manage their money, Palaniappan says. "Many people have been able to stay out of payday loans," because of these tools, he says.
Some prepaid card programs say they can help you build a credit history by reporting your bill payments to a credit bureau. The RushCard reports payments to two alternative bureaus — not the three major credit bureaus — and says some of its customers report getting more favorable terms on auto loans as a result.
But credit experts say a prepaid card, used to spend your own money on plastic, won't lead to the creation of that all-important FICO credit score that many creditors use. For that, you must show you responsibly use credit and have that activity reported to the major credit bureaus.
If you want a prepaid card, be prepared to do your homework before you buy one. You can't assume that all cards and fees are alike. And cards sold in stores often only list one or two fees, leaving you to dig through the card's terms online to find out all the rest, says Consumers Union's Martindale.
Also, consider how you would use the card, so you can minimize the fees you would trigger. You don't want a card with high ATM fees if you plan to make frequent withdrawals.
And once you get a card, keep a copy of the fees in your wallet so you don't forget them.
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