Prepaid Cards: The Best, The Worst, and When They're Worth the Fees

Prepaid cards
Prepaid cards recently released its Prepaid Cards Report, which put five of the most well-known prepaid card issuers under the microscope, evaluating Green Dot, NetSpend, AccountNow, American Express (AXP) and Capital One (COF) on how useful their products are based on fees and features.

The report looked at a couple of scenarios. In the first, a customer uses their prepaid card as an alternative to a checking account -- he receives a monthly paycheck of $2,000 and goes to the ATM once a week -- and looked at how much the card would cost. If the company has a nationwide network of participating ATMs, assumed that the cardholder could use one of them and avoid ATM fees.

Secondly, looked at what it would be like for a parent to use the card to give their teenager a monthly allowance of $100. If the teen went to the ATM twice a month, how much would the card cost? assumed the parent would fund their child's account through either a checking account or PayPal, which allows them to avoid a fee of up to $4.95 from reloading the card at a retailer. If the company has a nationwide ATM work, the parent would use them for free. The numbers for both scenarios take into account an average ATM surcharge of $2.33 for using out-of-network ATMs.

The Best and the Worst

Thumbs up went to Green Dot for being the least expensive option if you use a prepaid card as an alternative checking account. Its card has no monthly fee.

Green Dot also offered the least expensive cards to give a teen their allowance, ($5.95) with and American Express a close runner-up ($6.66).

However, American Express's new prepaid card can't be used as an alternative checking account: It was the only issuer evaluated that didn't offer direct deposit for paychecks, points out

NetSpend got two thumbs down for being the most expensive card when used as an alternative checking account ($24.32) or for a child's allowance ($19.61) a month. And those numbers don't include a slew of other fees NetSpend charges.

Fees, Fees and More Fees

The prepaid card business grew 20% from 2006 to 2009. They're the fastest growing form of electronic payment according to the Federal Reserve, and the market is likely only to get hotter.

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However, while consumers are snapping them up, it's important to emphasize that all prepaid cards are created equal, and shopping around can make a big difference, says Odysseas Papadimitriou, CEO of CardHub. "For example, in the hypothetical scenario we used in our report, the difference between the highest and the lowest cost was almost $25 a month, which amounts to $300 a year," he says.

The Consumer Financial Protection Bureau should put a high priority on limiting the number of fees prepaid card issuers can charge their customers, he says. "Certain prepaid cards charge many different fees in an attempt to disguise the true cost of using the card. If a card has 20 different fees, it is confusing for a customer to figure out how much a card will actually cost them."

Know Why You Need One -- and If You Need One

There's a reason Cardhub picked the two scenarios it did to rate the cards. There are only two good reasons to use a prepaid card, Papadimitriou says: as an alternative to a checking account and to manage a child's allowance. "If it's not being used for one of these two reasons, you are probably spending too much money for something you could get for much less."

Some people mistakenly think that a prepaid card helps them build their credit. Not so. Prepaid cards aren't credit cards, they are debit cards. "If you want to build credit and cannot qualify for a regular credit card, you need to apply for a secured credit card," says Papadimitriou.

Avoid 'Gotchas'

To properly use a prepaid card as an alternative checking account, make sure you're using direct deposit to load the card, because will save you a significant amount in fees, he says. Also, "ATM fees for certain cards can really add up, so if you can make a habit of withdrawing larger amounts of money once a month, this will save you a lot of money in ATM fees," says Papadimitriou.

What many people don't realize, says Papadimitrou, is that there is both an ATM withdrawal fee charged by your prepaid card company and an ATM surcharge charged by the ATM owner each time you make a withdrawal using most prepaid cards. Most cards clearly disclose the ATM withdrawal fee, but the surcharge is less obvious. Picking a prepaid card company that is affiliated with a a large ATM network that won't charge you surcharge fees will garner you significant savings. Green Dot is linked with a vast network of ATMs that waives both the withdrawal and the surcharge fee. Make sure you investigate the fees of each card based on how you plan to use it.

Prepaid cards can be a lifesaver for someone who cannot qualify for a regular checking account, and they're a better option than using an expensive check cashing store, says Papadimitrou. Still, "there are too many fees. It's difficult for consumers to figure out how much these cards truly cost."

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