Prepaid Cards Have Hidden Fees

Hidden expenses in prepaid cards

By EILEEN AMBROSE
BALTIMORE SUN
Published: Sunday, August 30, 2009 at 4:03 a.m.
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As students head back to college, marketers are promoting prepaid cards as a way for young adults to learn financial responsibility and for Mom and Dad to monitor a child's spending.

But a prepaid card can be an expensive teaching tool, and not necessarily the best one.

Basically, parents buy a card, load it with money and give it to a child to use like a credit card. It's up to students to track their spending. Once the money runs out, parents can reload the card.

A recent report by Consumers Union says prepaid cards can carry a wide range of fees, some of them hefty and not always easy to find. Fees vary from card to card, of course. But here is some of what Consumers Union found:

Some cards don't charge an activation fee; others do and charge as much as $29.95.

Many cards charge monthly fees that can be as high as $10. Some assess annual fees of $29.95 to $99.95.

Most cards charge a $2 fee to withdraw cash from an ATM, not counting a fee from the bank to use its ATM.

Cards often offer free ways, such as e-mail or text message, to check a card balance. Check it at an ATM and you may pay 50 cents to $1.

Overdrafts are possible if purchases aren't posted immediately and you spend more than the card holds. You can get hit with a $14.95 to $29 "shortage fee."

If you don't use the card for a couple of months or more, you might owe $1.50 to $5.95 a month for inactivity.

Consumers Union says some card issuers offer consumer protections in case a card is lost or stolen, but protections aren't guaranteed, as they are with debit cards.

"Until the protections are the same with the debit card, we advise consumers to stay away from this if at all possible," says Michelle June, a Consumers Union staff attorney. "We recommend that parents obtain a good old-fashioned bank account" for their college student.

The Network Branded Prepaid Card Association counters that Consumers Union doesn't give the full picture and should have compared prepaid cards to alternatives, such as check cashing and money orders, that are more costly to use. And the trade group says if not for prepaid cards, millions of consumers wouldn't have access to the convenience of plastic.

But college students don't belong in that group. They should have a checking account with a debit card tied to it. And when they learn to handle that responsibly over time, they can graduate to a credit card.

(Begin optional trim) Janet Bodnar, author of "Raising Money Smart Kids," says credit, debit and prepaid cards all have their drawbacks, but a debit card is the best way to teach financial responsibility to young adults. Sure, college students might get hit with a $30 overdraft fee if they overspend using a debit card, but that's a lesson they need to learn, and the earlier the better, she says.

Prepaid cards not only have a lot of fees, Bodnar says, but they send a message to students that if they overspend, parents will bail them out by loading more dollars onto the cards.

"You are not really teaching them to manage their own money," she says.