Prepaid Debit Cards: Fees and Protections

Prepaid Debit Cards: Watch out for High Fees

Are you looking for a way to deal with your personal finances, but don’t want to deal with a bank account, a credit card, or a bank debit card?

One alternative that is gaining in popularity is a prepaid card (sometimes referred to a prepaid debt cards). You can reload your card and use it to withdraw cash, make purchases at stores and online. Some of the common uses are for parents who want to give money to children, whether teens or college aged, but have a budgetary control over the spending. Other people, in financial distress, find a prepaid card a convenient way to cash a check and not hold on to cash.

MasterCard plugs their MasterCard prepaid card as allowing you to shop, pay bills, and manage money more effectively (master card). Another popular card is the RushCard prepaid Visa debit card. However, prepaid cards are not all similar and some come with very expensive fees.

One of the more popular types of prepaid cards is the GPR (General Purpose Reloadable) card. Learn more about the cards, including:

• Prepaid Cards: The main features
• CFPB and Prepaid Card Problems
• Shopping for a Prepaid Debit Card

Main Features of a Prepaid Card

Traditional banking includes checking accounts, debit cards and credit cards. There are new products that can bypass your bank account including payroll cards, gift cards, and prepaid cards. An increasingly popular card is the GPR (General Purpose Reloadable) card.

The GPR prepaid card is:

1. Usable in any place that accepts a regular credit card. (Unlike cards that are limited to a certain merchant or merchant group)
2. Reloadable through a direct deposit, cash, credit card, or bank transfer.

The GPR cards however come with a variety of fees including an issuance fee, monthly maintenance fee, ATM withdrawal fee, reloading fee, bill paying fee, and a fee to receive monthly paper statements (in addition to online statements). While some of these fees are similar to banking fees, and many are cheaper than other non-banking alternatives (such as a check-cashing stores), those fees can be quite high and vary greatly between card issuers.

A prepaid debit card is similar to a regular debit card in the way you can use it. However, it is not the same as your regular bank debit card, where each usage is directly tied to your bank account.

CFPB Report - Problems with Prepaid Cards

The CFPB announced in July 2012 that it would begin to solicit comments about the GPR cards. They noted that these kind of cards like regulatory protection, unlike traditional bank accounts, credit cards, debit cards, and even payroll or gift cards, which were specifically mentioned in the 2009 Credit Card Act.

Three main reasons the CFPB is reviewing the prepaid card market are:

• Increased usage of cards: The two major card issuers reported an increase from 3.4 million active cards in the first quarter 2009 to 7 million in the first quarter 2011. •
• Confusion with bank account rights: Although the GPR is an alternative to traditional checking accounts, (especially with direct deposit reloading), the card does not have the same regulatory protections as bank accounts.
• Unclear regulatory status: The regulatory control over GPR is not the same as credit cards, debit cards and other prepaid cards, such as payroll or gift cards. The consumer is most likely confused as to the rights they have and think they have rights that do not exist.

Here are some of the areas the CFPB is going to explore in more detail, and you need to look out for when shopping for a prepaid card.

• Fees and terms: There is no uniform manner in presenting the fees and terms of a prepaid card. So, carefully examine the fees you will pay on the card and the various terms that relate to overdraft and credit facilities.
• Unauthorized transfers: If your credit cards and bank debit cards are used without your authorization your liability is limited based on current laws and regulations. However, your prepaid card is not automatically covered for unauthorized transactions. Some of the bigger card issuers have voluntarily granted that type of coverage, so check before signing up for a program.
• Special Features: Most GPR cards do not include credit features, and that is one of their big selling points, because it allows for tighter budgetary control. However, some cards do all for overdraft and small line of credits. Check carefully to see if the card offers these features and if so, what are the costs and fees.
• Savings: Although few prepaid cards have a savings account, check if your card has this feature.
• Credit Repair: Prepaid debit cards are not generally reported to the major CRA (Credit Reporting Agencies), including Equifax, Experian and TransUnion. In general, a GPR debit card does not have a credit element, so its activities are not relevant to a regular credit report history and score. The Approved Card from Suze Orman, a new prepaid card backed by the financial adviser Suze Orman claims that its activity will be reported to TransUnion. However, there is no indication that TransUnion will use this information to determine your credit score. If you want to build or establish credit, then you are better to look for a secured card. If you want to save money, then shop around for a prepaid card with the best terms, or use a bank debit card.

Prepaid Card: Smart Usage

A prepaid card can be a smart alternative for those who do not have a bank account, or for those who want to implement some type of budgetary control over their spending. (Don't forget to create and maintain your own personal budget). One popular usage is for parents to transfer money to a teen or college student. The user gets a fixed amount of money and cannot spend more than is available.

Fees and terms vary greatly by card issuer and type of card. Some GPR cards have high maintenance and reloading fees. Oftentimes, the cards do not come with protection regarding fraudulent usage of the card, unauthorized transactions, or FDIC insurance on the balance of the card. Make sure that you understand the product features offered and the costs you will bear. Pay special attention to monthly fees, ATM fees and reloadable fees. If you don’t want credit and overdraft facilities, which basically undermine some of the main advantages of the cards, then make sure that they are not part of the card.

Shop around! Many card issuers have used celebrities to market the cards, such as the ill-fated Kardashian card, which came with very high monthly fees only to be discontinued after a short period. Before taking out a GPR card, just like any financial product, shop around.