10 Things Prepaid Card Issuers Won't Tell You By ANNAMARIA ANDRIOTIS
Suze Orman and A-Rod are pitching these popular products, but experts say beware of the pitfalls.
1. "Our fees are outrageous."
Prepaid cards are the hottest things going in plastic these days. They allow consumers to load money onto the card and make purchases or cash withdrawals.
Unlike a debit card, prepaid cards aren't typically tied to a checking account, and they're largely intended for consumers who don't have a bank account and households that use alternative services like payday loans and check cashing services, says Brent Watters, senior analyst with the prepaid advisory service at Mercator Advisory Group, a banking research and consulting firm. But the cards are also popular with college students or other Americans who may use them to help manage finances and avoid debt.
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Indeed, since the recession, the cards have increasingly been marketed to the average consumer as a tool that helps them avoid overspending, Watters says. Sounds great, right? But experts say there's a huge downside to prepaid cards: hefty fees.
The median activation fee -- a charge simply to start using the card -- is about $10, according to a report by Consumers Union. Then there are monthly maintenance fees (as much as $10 a month), withdrawal fees (around $2, not including the fee charged by the ATM owner), and shopping fees (another buck or two for PIN-based transactions).
Consumer advocates say the high costs wipe out most of the benefits of using prepaid cards. "Those fees are assessed on consumers who cannot afford to be nickel and dimed," says Kenneth Edwards, policy counsel at the Center for Responsible Lending.
Card issuers charge all these fees to handle the costs of these cards, including data processing, customer service and fraud management, says Rob Rosenblatt, CEO of UniRush, a company founded by music mogul Russell Simmons that has a series of prepaid cards. But, he adds that "cards should be free," noting that the company plans to reduce its fees in the future
2. "Celebrity endorsements don't necessarily make our cards better."
Personal finance guru and TV celebrity Suze Orman, comedian George Lopez, musician Lil' Wayne and Yankees third baseman Alex Rodriguez have at least one thing in common: they're among the latest to join a growing list of celebrities pitching prepaid cards to the public.
Consumer advocates worry that the celebrity marketing could encourage people to sign up for cards that have a host of fees and limitations. Already, at least one celebrity prepaid card has crashed and burned: Less than a month after the reality TV stars the Kardashians launched their prepaid card in 2010, they pulled it from the market amid a storm of criticism.
Card companies counter that the celebrity pitches are genuine and that the cards are good deals, in particular as an alternative to carrying cash for consumers who don't have bank accounts. "We teamed up with George Lopez to expand Mango's message of empowerment and bring awareness of important issues such as savings and money management," says Bertrand Sosa, co-founder and president of Mango Financial, the company that partnered with Lopez for its prepaid card.
Separately, A-Rod partnered with Russell Simmons' RushCard prepaid cards back in September. "His goal, like ours, is to assist millions in managing their finances," says Rosenblatt, CEO of UniRush, which launched the RushCard
Meanwhile, Suze Orman is funding her card, introduced in January, with her own money. "Suze has spent her entire career trying to help people get their financial house in order, and has always geared her advice to those people who have less than financially speaking," says Abigail Gardner, a spokeswoman for Orman's "Approved Card."
3. "Our fees may eat your unemployment benefits."
At least 41 states are now using prepaid cards to distribute unemployment benefits to their residents, according to the National Consumer Law Center. Just three of those states -- Alaska, Florida and West Virginia -- offer both paper checks and direct deposit as alternatives.
Using prepaid cards can save states money because they don't have to print checks or deal with the costs of checks that get lost in the mail or that don't get cashed, says Lauren Saunders, managing attorney at the NCLC. With prepaid cards, the banks, not the state governments, incur most of the costs if they're lost.
For the jobless, card fees can eat into the already meager unemployment payment they receive, says Saunders. Cards in roughly 24 states charge up to $1.50 for a denied transaction. Cardholders who want to speak with a live customer service agent could have to pay: while 40 states permit at least one free call per month, they then charge 20 cents to $3.00 for any subsequent calls.
In a few states, they'll also incur fees for going shopping with their card of about 25 cents per transaction. Not using the card doesn't come cheap either. Twenty-eight states charge 50 cents to $3 per month on cards that are unused after a period ranging from three months to 14 months.
To avoid these fees, experts say state residents who have bank accounts should consider getting their unemployment benefits without a prepaid card. Most states will directly deposit the benefits into recipients' bank accounts upon request, says Saunders. Or, if they receive their benefits on a prepaid card, they can consider transferring that money to their bank account (though some cards charge for that too) she says.
The banking industry says consumers can avoid many of the fees that accompany the prepaid cards. "A high percentage of users don't pay any fees," says Teri Charest, a spokeswoman for U.S. Bank, which issues 10 states' prepaid unemployment cards.
4. "We won't improve your credit score."
Prepaid cards are often pitched to consumers who may not otherwise qualify for a credit card. But what the ads and promotions often don't mention is that using a prepaid card has no effect whatsoever on your credit score. Unlike credit cards, consumers' activity on prepaid cards is not reported to the three major credit bureaus -- Equifax, Experian and TransUnion -- and does not appear on credit reports issued by those companies.
It's the information in those credit reports that determines a consumer's FICO score, which is the credit score most lenders review when deciding whether to approve a borrower for a loan and at what terms, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit monitoring site.
Suze Orman says her prepaid card could change all that because her goal is for prepaid card transaction data to be included on credit reports. Orman's card has partnered up with TransUnion. In her conference call last month presenting the card, Orman said the bureau will evaluate how cardholders manage the card.
That doesn't mean much for consumers using the card now. TransUnion will do the evaluation over the next year and a half to two years to determine the impact it could have on a consumer's credit profile, says Colleen Tunney-Ryan, a TransUnion spokeswoman.
Meanwhile, RushCards reports regular bill payments made with its prepaid cards to PRBC, a lesser-known credit reporting agency whose reports are used by relatively few lenders. RushCard's CEO Rosenblatt says the company is trying to forge relationships with the larger credit bureaus. "Credit reporting with prepaid cards is still an experiment and to date is unproven," he says. "This is a work in progress, industry wide."
5. " Old fashioned checking accounts are still a better deal."
Fans of prepaid cards say they can be a better deal than checking accounts -- especially these days when banks are upping checking account fees. But many checking accounts are still more affordable than prepaid cards, says Ulzheimer.
Around 45% of noninterest checking accounts are free, according to Bankrate.com's 2011 report. And there are accounts that don't require large balances to get good deals: At ING Direct and Charles Schwab Bank, for instance, there is no minimum balance required to avoid a so-called maintenance fee.
Separately, checking accounts can be more convenient to use than prepaid cards, says Odysseas Papadimitriou, chief executive at CardHub.com. With checking accounts, consumers can pay their bills online but that's not always the case with prepaid cards.
The American Express prepaid card and the Mango prepaid card don't have this feature, but both companies say they're looking at including it this year. (Mango says it used to feature bill pay and is working on reintroducing it.)
Depositing money onto a prepaid card can also get tricky. With a debit card, cardholders can deposit cash at their bank or in their bank's ATM. But in most cases with prepaid cards, consumers will need to either set up direct deposit, transfer money from an existing bank account or use PayPal. If cardholders want to deposit cash, they will often pay a fee for that service.
Prepaid card issuers say their cards can be a better deal than debit cards and checking accounts for some consumers. "If you're happy with your bank, or happy with your credit union, you should stay with them," Suze Orman said last month.
"But there are many people out there who aren't happy [and] they've asked for an alternative." Orman's card does feature online bill pay and it allows for direct deposit and bank account transfers for free; adding cash is also possible though at a cost of $3.50 per reload.
6. "Consumers can game some of our cards."
For all their pitfalls, at least two prepaid cards stand out by offering a perk that's almost impossible to find elsewhere now: high interest rates. How high? After fees are accounted for, those rates are nearly 5%. But to earn this interest, consumers will need to strategize.
For instance, the NetSpend prepaid card offers 5% APY on its savings account. Consumers who keep $5,000 in the account for one year could earn $242 in interest or 4.84% after fees.
The fees include 50 cents for cardholders to check their balance once every three months to avoid a maintenance fee for inactivity. And a $5.95 fee to withdraw the money with a check at the end of the term. Meanwhile, the Mango card offers up to 6% APY on its savings account.
Consumers who keep a balance of $5,000 for one year and are enrolled in direct deposit in that account could earn $230 or 4.6% after fees. Those fees are the $5 monthly fee that they'd incur if they didn't add at least $500 into the account each passing month and a $10 fee to withdraw the money at the end of the term with a check.
Both companies say they're focused on providing alternative banking solutions to consumers that go beyond prepaid cards.
7. "If we go broke, some cardholders could be out of luck."
When consumers stash their money in a bank account, their money is insured by the Federal Deposit Insurance Corporation. But don't assume that every prepaid card offers this guarantee.
When consumers load money onto a prepaid card, some issuers stash those funds in a bank account, and in those cases consumers' money is often FDIC insured. But if a card issuer that doesn't meet FDIC insurance requirements shuts down, it will be up to the bankruptcy courts to decide if cardholders will get all or some of their money back, says Papadimitriou.
American Express' prepaid card doesn't offer FDIC protection but if a card is stolen or lost it will replace funds on a new card at no cost, says a spokeswoman. Also, funds on the so-called MoneyPak, a card-like product that consumers can use to load cash on prepaid cards, are not FDIC insured.
That's because MoneyPak isn't a bank account, says Liz Brady, a spokeswoman for Green Dot, which owns MoneyPak. Consumers can purchase MoneyPak (it costs up to $4.95) for the amount equal to how much money they want to deposit on their prepaid card. They then use it to load the funds onto their prepaid card.
Brady recommends transferring funds from MoneyPak onto prepaid cards as quickly as possible.
8. "We're not so regulated."
Consumer protections against abusive credit-card practices have ramped up during the past few years in large part due to the CARD Act. This legislation, which was signed into law in May 2009, limits the fees credit-card issuers can charge, among other things. Prepaid cards, however, were not included in this law, which is partly why there aren't any official limits on the fees they charge, says Ulzheimer.
On top of that, the federal consumer protections in place for credit and debit card fraud aren't required for prepaid cards, say experts. If a prepaid card is stolen, the cardholder may be hard pressed to get that money back.
(In contrast, consumers are on the hook for no more than $50 in fraudulent credit card charges.) It's up to each card issuer to decide if it wants to offer theft protection, says Jean Ann Fox, director of financial services for the Consumer Federation of America.
Thankfully, some prepaid issuers have stepped to the plate. American Express and MasterCard, for instance, replace funds at no cost if a prepaid card is stolen or fraudulently used.
9. "Law enforcement is on our back."
In response to concerns that prepaid card issuers were not disclosing all their fees, the Florida Attorney General's office launched an investigation last May into five prepaid card companies -- First Data Corp, Green Dot Corp, Account Now, NetSpend and UniRush Financial Services.
The investigation is looking into allegations of possible deceptive practices, says Florida Attorney General's office spokeswoman Jennifer Meale. Some companies, says Meale, may have been falsely claiming that their prepaid cards could help improve cardholders' credit scores, which isn't true. (See item #4)
The federal government is starting to take a closer look at prepaid cards as well. A Senate bill entitled "Prepaid Card Consumer Protection Act of 2011" was introduced in December and would require card issuers to provide more fee disclosure, among other things. The bill is awaiting review by a Senate committee.
The companies say they've been clear with consumers about their fees. Steve Streit, CEO of Green Dot Corporation, says that the company's fees are all disclosed on their cards' retail packaging that consumers can view before purchase as well as on its web site and the cardholder agreement that accompanies the card.
"We believe that the fees associated with our reloadable prepaid cards are reasonable and we make every effort to disclose them effectively," says Cara Crifasi, a First Data spokesperson. UniRush CEO Rob Rosenblatt says the claims made by the Florida attorney general are "without merit," adding that the company ensures all fees are fair and transparent. NetSpend spokeswoman Krista Shepard says the company complies with the law. Account Now declined to comment.
10. "The perks aren't so great."
Many prepaid card issuers tout discounts and freebies that consumers can get without signing up for the card. For example, consumers who sign up for Suze Orman's prepaid card can receive their TransUnion credit report and credit score for free on a daily basis for one year. But it's easy to get that information for free without becoming a card holder.
At AnnualCreditReport.com, consumers can check their credit reports from the three major credit bureaus, including TransUnion, for free once every 12 months. And, CreditKarma.com allows consumers to see their TransUnion score for free every day. Gardner, the card's spokeswoman, says its main focus is to give consumers access to plastic for everyday spending and bill pay and that the credit score and report are added features.
Another example: the RushCard comes with a prescription discount card that consumers can use at 56,000 drugstores in the country to get 10% to 85% off on medicines. That prescription card is administered by HealthTrans, a health care management services provider.
But consumers can easily sign up for the prescription drug card on the company's PathtoBetterCare site. RushCard CEO Rosenblatt confirms that consumers can get this prescription discount card even if they don't have the prepaid card.