Prepaid cards: a tool or trap?

You see them in every convenience store, but are prepaid cards different than gift cards? Comparing fees is key.

No doubt you’ve either seen or even received a prepaid card marketed by financial institutions and celebrities alike. Are these cards an asset in your financial tool box or will they become just another drain on your finances?

Prepaid cards can come with a wide variety of fees including balance inquires, customer service calls, monthly maintenance, reloading funds, transaction fees and over-the-limit fees. Basically, if you check your balance, add more money, purchase items or go over the amount loaded on the card, you can have an additional fee deducted from the card. While this seems counter intuitive, these fees make prepaid cards a very profitable product for financial institution. Fees range from $2.50 for an ATM withdrawal to $14.95 for a monthly maintenance fee. In 2011 consumers loaded $70.7 billion dollars on to prepaid cards. This amount is expected to top $120 billion in 2012 according to the Mercator Advisory Group.

Prepaid cards can be a useful financial management tool because it is not necessary to have a bank account or undergo a credit check to utilize the card. Most cards are Federal Deposit Insurance Corporation (FDIC) insured up to $250,000 just like a bank account. Carrying a card is much safer and convenient that carrying cash. Unlike gift cards that you often throw away when they are depleted, prepaid cards can be “reloaded” (add more money) as often as necessary. There is no credit extended with prepaid cards, you spend up to the amount that has been loaded on the card. Loading methods vary but may include cash; at participating businesses or third party services such as Pay Pal, wire transfer or direct deposit. Most cards will allow the card holder to monitor the card balance, set up text or email alerts, schedule balance transfer or pay bills on line for free.

It is important to note that by next year, people who collect Social Security or other government benefits will receive payments either by direct deposit or prepaid cards as checks will no longer be issued. The Consumer Financial Protection Bureau (CFPB), which is charged with protecting consumers from deceptive practices, is expected to examine the prepaid market, particularly those carrying government benefits.

Michigan State University Extension financial management educators agree that a prepaid card can be a very useful financial tool. The best way to make sure a prepaid card works for you is to compare cards carefully before purchasing. Make sure that you check all of the options. Consumer Action conducted a Prepaid Card Survey that examined 28 cards form 11 issuers. Understand all of the fees and decide how and where you will use a prepaid card to keep these fees to a minimum.

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