Prepaid debit cards are everywhere these days — and so are their fees.
The cards allow you to load cash onto them and are accepted by businesses just like other types of plastic.
But you might have to pay a fee to activate the card, make ATM withdrawals, check your balance, talk to customer service or reload money onto the card. Monthly fees can be as high as $14.95, and you could be dinged up to $5.95 if you haven't used the card in a while.
"This is sort of a gift card with lots of fees," says Ruth Susswein, a spokeswoman with Consumer Action, which recently published a survey on prepaid card fees. "There can be fees for the most absurd reasons."
Not all cards charge all these fees, of course. It's possible to find cards without maintenance and activation fees and that don't charge to reload money.
And savvy consumers can shop around for a card with the fewest fees based on the way they will use the plastic. You can, for instance, avoid monthly charges with some cards by loading $500 or $1,000 each month onto the card.
But the important thing is that you do your homework before buying a prepaid card — and that includes exploring whether cheaper bank alternatives exist. Otherwise, you might find yourself nickeled-and-dimed just to use your own money.
The prepaid card market has been growing rapidly for several reasons.
"It addresses a need that checking can't," says Anisha Sekar, vice president of debit and credit products at NerdWallet, a card comparison website.
Prepaid cards appeal to people trying to control spending and avoid overdraft fees, which typically run $35, Sekar says.
The cards also are used by consumers who don't want a regular bank account or can't get one because they bounced too many checks.
Some colleges use the cards as student IDs and to disburse financial aid, says Ben Jackson, a senior analyst with Mercator Advisory Group, a market research and consulting firm.
And consumers also buy prepaid cards to shop online without exposing their debit card information on the Internet, Jackson adds. (That's not a bad idea, given the lax security provided by some businesses.)
Financial services companies are jumping on the prepaid bandwagon. Just last week Chase announced the launch of Chase Liquid, a prepaid card that will be available nationwide this summer.
For financial institutions, prepaid cards are a way to reach the estimated 60 million Americans without a traditional banking relationship. It also gives them a product to market to college students, now that federal law restricts young adults from getting credit cards on their own.
And most reloadable prepaid cards aren't subject to new federal limits on how much banks can charge merchants to process transactions.
"The prepaid card market is another way to fill the revenue hole," says Greg McBride, a senior financial analyst with Bankrate.com.
Mercator reports that $28.6 billion was loaded onto prepaid cards three years ago, and it projects that figure will climb to $167.2 billion in 2014.
And that's not even counting all the prepaid cards used for payroll and government benefits, another area where the use of this plastic is growing. Next year, Social Security beneficiaries who don't get benefits directly deposited in a bank or credit union will receive a prepaid card.
This expansion of prepaid cards is why consumers need to be familiar with the cards and their fees.
A few recent prepaid card surveys reveal plenty of fees.
"That's why for the majority of people, low-cost and free checking accounts remain your better options," says McBride, who added that you can still find those at credit unions and community banks.
Bankrate released a survey of the top 18 prepaid cards last week and found that seven of them assess an activation fee ranging from $3 to $14.95. A handful charge from 49 cents to $2 each time the card is used to make a purchase. More than half hit customers with a $1 to $5.95 fee to get a statement in the mail. And one-third charge $1.95 to $5.95 after a certain number of months of inactivity.
Meanwhile, Consumer Action, which surveyed 28 cards, found that 20 of them carry a monthly maintenance fee. The highest: $14.95 assessed by READYdebit Visa Prepaid Platinum.
Use the card to make a cash withdrawal from an ATM outside the issuer's network and the fee ranges from $1.95 to $3, Consumer Action found. And a handful of cards charge to reload money.
Ten cards charge 50 cents to $2 to talk to a customer service agent, Consumer Action reported. Two charge 50 cents for automated help.
"Many of the cards have ways to avoid fees," says Susswein, adding that some even list these methods on their disclosures.
For instance, you can avoid a fee for checking the card balance at the ATM by looking up the information online or setting up text alerts when the balance falls to a certain level, Susswein says.
Jennifer Tramontana, a spokeswoman for the Network Branded Prepaid Card Association, notes that the costs associated with the cards have been coming down as more players enter the market.
You can dig into card disclosures to uncover fees, or check out NerdWallet.com, which compares more than 60 prepaid cards. That includes the new Chase Liquid prepaid card, described by NerdWallet as one of the cheapest cards.
The website allows you to plug in how you expect to use the plastic — such as number of monthly ATM withdrawals, bill payments and balance inquiries — and then lists the least expensive cards for you. NerdWallet also compares prepaid cards with checking accounts.
Consumer advocates have concerns about prepaid cards besides fees.
Prepaid cards, with some exceptions, don't have the regulatory protections of debit cards that limit the consumer's liability if a card is lost or stolen, Susswein says. While issuers say they will extend this protection to prepaid cards, they can always change their minds, she says.
And a prepaid card won't help you build a credit history because it's cash, not credit.
Customers who develop a good record with the American Express prepaid card, however, may be invited to apply for a charge card that must be paid off monthly. And a charge card can help you build a credit history.
If you still think a prepaid card will work for you, take the time to research different cards. Given the wide variety of fees, it will be well worth the time.