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The Perils of Prepaid Debit Cards

October 8, 2009

Prepaid debit cards aren’t that different from gift cards, so they must be relatively harmless, right?  Wrong.

A recent NYT article helped shine a light on the many hidden fees associated with prepaid debit cards, and on the utter lack of regulation of these products.

The basic idea behind these prepaid debit cards is that the seller loads the card with money at the time of purchase, and then you can use the card and spend your balance until the money runs out.  The catch here is that the money may run out a lot sooner than you expected, thanks to a bewildering variety of hidden fees.  How big a problem is this?

  • * In 2008, customers loaded about $8.7 billion onto prepaid cards, more than double the amount in the preceding year.  This amount is projected to surge to $119 billion by 2012.
  • * The six cards that this article looked at would charge a customer between $38 and $75 dollars for two months of typical use, excluding any purchases.
  • * The Pay-O-Matic prepaid card come with more than two dozen fees.
  • * A Consumers’ Union survey of two dozen cards found that most major banks offer low-balance checking accounts for $10 or less a month, while the Wal-Mart money card costs $16.59 the first month and $21.54 the second.
  • * Prepaid debit cards (with all their tricks and traps) are being used in place of checks to dispense social security and welfare payments to people without checking accounts.

While all of these facts indicate the need to regulate prepaid debit cards, we at AFFIL are particularly concerned because the abuses fall primarily on those who can least afford them.  Users of prepaid debit cards generally fall into two categories: those who don’t trust the financial system, and those who don’t have enough assets to qualify for mainstream financial products.  As a result, college students, immigrants, and people with low-incomes tend to be the main users.

Our advice: avoid prepaid debit cards  whenever possible.  If you must use them, make sure you know the potential pitfalls and shop around for the most sensible deal.

(Photo: chego101)

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