Prepaid Cards Are 'Risky' and Loaded with Fees, Pew Study Finds

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prepaid credit cardsBy Jennifer Liberto @CNNMoney

A new study on prepaid cards found that they carry "significant risks," including lots of undisclosed fees, according to a nonpartisan Washington think tank.

Most of these cards carry between 7 and 15 different kinds of fees, according to Pew Charitable Trusts, which reviewed 52 cards that represent 75% of the market. And that market is going gangbusters. In 2009, consumers loaded $28.6 billion on to prepaid cards. Next year, consumers are expected to load $201.9 billion onto the cards, according to the report.
Reloadable prepaid cards work like debit cards, except they don't require a bank account. Users can load money onto them and use them anywhere debit or credit cards are accepted. Prepaid cards tend to serve those with bad credit or questionable immigration status, and can typically be reloaded with cash at major retailers like Wal-Mart (WMT) or CVS (CVS). In some areas, especially lower-income neighborhoods, there are more places to reload a prepaid card than there are bank branches. But they're also used by consumers who do have bank accounts and want to ensure they're not spending more than they've earned, said Pew director Susan Weinstock.

Pew found that fees on prepaid cards ranged between $.50 and $9.95, and that it's often unclear to the consumer when they'll be triggered. There are fees charged just to acquire and activate a card, monthly service fees and fees for talking to a customer service representative, to name a few. And some fees are less likely to be disclosed, such as a fee that's often charged when a purchase is declined, the report said.

Generally the report found that prepaid cards offer few of the same consumer protections afforded to bank accounts, such as deposit insurance guaranteed by the Federal Deposit of Insurance Corp.

"Consumer protection gaps make prepaid cards risky," Weinstock said.

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Prepaid cards are considered riskier than credit cards, which are governed by a raft of new laws that require issuers to warn consumers before interest rates go up, and notify them about things like how much more debt they're taking on when they only make a minimum payment.
The Pew report also cited the lack of federal supervision over prepaid cards as a matter of concern.

"This lack of oversight could turn a potentially beneficial emerging product into a haven for predatory lenders and other unscrupulous actors," the report stated.

The relatively new Consumer Financial Protection Bureau has announced it's looking into the prepaid card market and considering rules that would force the prepaid card issuers to clarify their fees.

Pew's report did find that prepaid cards offer a better deal for the kinds of consumers who tend to rack up fees for overdrawing their bank accounts, which can cost as much as $35 per overdraft.

For a consumer who overdraws his bank account once a month, prepaid cards are less expensive. That consumer would pay roughly $22.15 in prepaid card fees, as opposed to an average of $28 in monthly overdraft fees, according to the report.

-- CNNMoney's Blake Ellis contributed to this report.

Prepaid Cards Are 'Risky' and Loaded with Fees, Pew Study Finds

Credit card sign-on bonuses are certainly enticing, but you shouldn't be signing up for every card that's offering some cash back. This is because each application and subsequent credit pull will generate a hard inquiry that will appear on your creditreport. (Credit pulls that aren't used to decide whether you are actually getting a loan – for instance, one conducted by a landlord or by a bank when you are looking to get a checking account – are considered soft inquiries and will have no impact on your score.)

Each hard credit card inquiry will cost your score between three and five points and stays on your report for two years, though they only negatively impact your score for about half the time they appear.

One missed payment may seem innocuous enough, but in reality a single delinquency can cost a previously stellar credit score to fall more than 100 points. The good news: As long as the missed payment doesn't lead to additional woes, your score will start to rebound relatively quickly and it can get back to good standing in about 12 months following the delinquency.

(Those who already had poor to mediocre credit prior to the new missed payment will experience less of an initial ding, but their scores won't bounce back until well past the 12-month mark.)

To avoid taking the big hit, consumers can try calling creditors to ask for a good will deletion. They are more apt to oblige if the late payment was truly atypical behavior.

You should think twice before officially closing that credit card you opened back in college, especially if you're getting ready to apply for a new line of credit. Closing an old account can have a negative impact on yourcreditscore since it can lower your credit-to-debt utilization ratio, which is essentially how much credit you have at your disposal versus how much credit you are actually using.

According to FICO, it can also cost you points you might have been netting by having an ideal number of credit cards in your wallet.

The exact effect this has on your score will vary, depending on the rest of yourcredit profile, but the advice is consistent.

"If there is no annual fee, just charge something small every now and then," says Adrian Nazari, CEO of Credit Sesame. This will keep the issuer from deciding to close the account for you.

As MainStreet has previously reported, it's never a good idea to bump up against your overall creditlimit because your credit utilization ratio will appear sky-high. However, according to Chris Mettler, founder of CompareCards.com, maxing out a single card can negatively influence your credit score as well. (Again, the exact impact would depend on the rest of your creditprofile.) As such, if you do have a particular card that's bumping up against its limit, you'll want to pay that down as soon as possible.

"You don't want your balance due to be over 33% of the availablecredit line," Mettler says.

Credit card issuers typically only report two things to creditbureaus each month: whether you're up-to-date on all your payments and what your balance at the time is. As such, running up big purchases right before your statement closes – and the issuer reports the information – can negatively impact your credit-to-debt utilization ratio and subsequent score, regardless of whether you go on to pay off that balance on time or not.

"The trick is to make sure your balance is low before it is reported," Nazari says. This is why it can be a good idea to pay off purchases as you make them or prior to the end date of your billing cycle.

Even if you're not particularly credit active, it's a good idea to take advantage of the free annual credit report the Fair Credit Reporting Act entitles you to, if only to scour it for incorrectly attributed delinquencies, accounts or inaccurate balances, which can all do varying amounts of damage to your score. This is because errors on credit reports are all too common. As MainStreet has previously reported, about 30% to 40% of all credit reports have some type of error on them, some of which can unfortunately be difficult (and time-consuming) to remove.

You may think that you don't owe that unpaid medical bill that keeps getting sent to your house, but your score is still in jeopardy if you decide not to pay it. Many places that don't lend money, like a hospital or cable company, will send their unpaid bills to a collections agency after a certain amount of time and they will report you to the credit bureaus. Similar to a missed mortgage, credit card or auto loan payment, this delinquency can cost good scores 100 points or more.

"Whether you are right or wrong, [the bill] will negatively impact your score," Mettler says. As such, consumers may want to shore up the bill in an effort to spare their score or dispute the bill through proper channels to get it eradicated.

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