Prepaid debit cards are the latest fee-generating vehicles for financial institutions looking to replace revenue lost when credit card fee regulation started in 2010. Prepaid cards have no fee restrictions and can charge for everything from using an ATM to calling customer service. The Consumer Financial Protection Bureau predicts that consumers will load $167 billion onto prepaid cards by 2014. That’s a lot of dollars loaded onto a wide variety of cards. With so much choice, smart consumers will look for a card that offers the benefits they need without excessive fees.
If you shop around for the card, you can find one that fits your situation the best, depending on your spending habits, how frequently you buy things and what you want to do with the card. Out-of-pocket expenses can add up quickly when you consider the long list of potential fees for prepaid cards:
- Purchase fee – what you pay to buy the card itself
- Activation fee – another fee to activate the card so that you can access the funds that are loaded onto it
- Monthly “maintenance” fee – a common fee that may be tied to the balance you keep on the card or other conditions
- Reloading fee – a fee paid to put more money on the card; you may also incur a fee with a third party who converts your money to electronic form for loading purposes
- Funds transfer fee – a fee that you must pay when funds get transferred from one card to another or from a specific account
- Purchase transaction fee – a charge for using the card to buy something; these fees vary and may be waived on a limited number of purchases
- Denied transaction fee – a fee that may be added if you try to make a purchase without sufficient funds
- Overdraft (or shortage) fee – a few cards will cover a transaction if you have insufficient funds and they cover the purchase anyway
- ATM withdrawal fee – some cards will permit a few free ATM withdrawals in network but out-of-network or additional withdrawals may involve added fees
- Balance inquiry fee – a fee that you must pay just to check the balance on the card
- Foreign currency conversion fee – a fee you incur just for using your card outside the U.S.
- Inactivity fee – a fee that gets added if you don’t use your card within a specific period of time (e.g., 60-90 days)
- Card replacement/reissue fee – a fee you must pay if your card is lost, destroyed or stolen
- Paper statement fee – charged for requesting a paper statement rather than viewing it online
- Customer service fee – a fee that gets charged if you call customer service and ask to talk to a person rather than using an automated system; even some automated systems charge a small fee
- Closure fee – a fee you must pay just to stop using the card
Fees and benefits can vary widely from card to card. For example, many prepaid cards don’t have protection for unauthorized charges or lost or stolen cards. Some cards do have those protections, so you need to do some comparison shopping. Don’t just run to a discount store and buy the first prepaid card you see. If you do, it’s pretty likely you won’t get the best deal you could. Prepaid cards can be an option for someone who can’t open a checking account, or as a means for providing funds for a teen, college student or an elderly parent. Just make sure that the card doesn’t have future fees that they’ll incur because they don’t understand what happens when they use the card.
Prepaid cards might be a way to teach money skills to a teen or college student. If they run out of money the third week of the month, they’ll learn that you can’t have everything you want, and there are limits to what you can spend. It’s a lesson they can learn without going over a credit limit or running up a balance that they can’t realistically pay.
Prepaid cards can be beneficial, but as with so many other financial instruments, it depends – on what you use your card for, how often you use your card, where you use your card and many other factors. Do your homework, think about how you will use a card, and fully investigate the terms and conditions of several cards so you can make the decision that is best for you and your situation.
By Brenda Procter, M.S., Extension Associate Professor, MU Personal Financial Planning Department and Debbie Johnson, Audio Producer/Director, MU Cooperative Media Group
Source: Howard, Alegra. Consumer Action News, Prepaid Card Survey: Convenience at a cost, April 2012