Fee, fi, fo, fum: Prepaid card fees gobble your cash

Cash machineEveryone's hating on the banks these days for their debit cards with outrageous overdraft fees, but the alternative is no great shakes. Prepaid debit cards have stepped into the market for consumers who can't get a credit card, don't have a bank account and want the convenience (or the status) of whipping out a card.

These cards are branded with the logo of major issuers like Visa, MasterCard and Discover and can be used wherever those cards are accepted. Customers buy the card and load cash onto it. With cute names like Rushcard and offered by friendly-sounding companies like Green Dot Corporation, these cards are pitched as an alternative, a way to avoid those big, bad banks and their overdraft fees.

Technically, the prepaid card issuers are telling the truth when they say their cards don't sock you with overdraft fees. That's about the only thing you won't see a fee for, though. Prepaid cards charge users for nearly everything they do with the card. This article in the New York Times details fees for activating a card, making a purchase, checking a balance, paying a bill online, reloading the card and calling customer service -- even to straighten out a mistake the company made. Oh, and this is on top of the purchase price. One of the cards is even called out by the Times for issuing what it calls a "shortage fee" if customers try to buy something that costs more than what's in their account. Sounds suspiciously like an overdraft fee, doesn't it?

What's more galling to watchdog groups like Consumers Union is that these cards are generally marketed to people who can't get a credit card and don't have a bank account; in other words, the low-income, poorly educated consumers who are both less likely to know they're being taken for a ride and less able to afford the fees that nibble away at their balance. Hip-hop mogul Russell Simmons has taken flack for marketing his prepaid Rushcard specifically to African-Americans.

These cards have other disadvantages that also hit poor consumers harder: Unlike a traditional savings or checking account, there's no way to earn interest on the money you deposit on the card, and using them doesn't boost your credit score the way a carefully-managed credit card can. In other words, even while these cards are offering a service, they're keeping users in a second-tier banking system that doesn't reward them or help them build a solid fiscal foundation.

The prepaid card people are given a chance to defend themselves in the Times article, and they do a pretty lame job of it. One industry apologist interviewed defended the cards by claiming that prepaid cards are cheaper than traditional bank debit cards. A study sponsored by the industry claimed to back up this assertion.. But if you look at the numbers, going prepaid is only cheaper if you overdraft a typical checking account at least every other month. Can we suggest an even better way to save that cash? Keep track of how much money you have, and don't spend more than that! Think about it: Is a little fiscal discipline really worth the $207 you'd spend on a prepaid card? (Also, keep in mind that this is the industry's own math here for how much it costs to use a prepaid card for a year; Consumers Union found that some cards could cost users close to $100 in the first two months of use alone.)
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