Prepaid cards light on protections, heavy on fees

After your interest rate was increased to 21 percent, you swore off credit cards. You stopped using your debit card after you were burned by a $40 overdraft fee for a $3 latte. But you don't want to walk around town with a bucket of cash. The financial services industry has an answer to your dilemma: prepaid cards. They look just like credit cards, are accepted almost anywhere and can be purchased at grocery stores, drugstores and online.

If you're the parent of a college student, a reloadable prepaid card offers a way to provide Junior with money for textbooks and pizza without giving him access to your credit card. Prepaid cards are also popular with folks who are uncomfortable using credit cards to shop online.

But consumer advocates warn that prepaid cards lack the consumer protections offered by credit and debit cards, leaving consumers vulnerable if their cards are lost or stolen. Many prepaid cards also charge steep and stealthy fees, according to a new report by Consumers Union. "There are fees everywhere you turn," says Michelle Jun, staff attorney for Consumers Union.

The Network Branded Prepaid Card Association, a trade group for the prepaid card industry, said the report was misleading. Network-branded prepaid cards, which carry a MasterCard or Visa logo, provide "zero liability" protection for lost or stolen cards, says Terry Maher, general counsel for the NBPCA. If you report that your card was lost or stolen, the issuer will replace the funds and issue you a new card, he says.

Jun counters that the protection is voluntary and doesn't apply when consumers use a PIN to make purchases.

While there's considerable variation in the fees charged by prepaid cards, it's often difficult to shop around for the least expensive card, Jun says. Retail displays of prepaid cards typically disclose purchase prices and the amount you can load on the card, but little else, she says. "Some of the prepaid issuers are trying to put more information on the back of cards or in the inserts, but if you're looking or shopping online for a prepaid card you have to go through a lot of pages to get to the fee schedule," Jun says.

What to watch out for:

-- Activation fees. Of the 19 prepaid cards Consumers Union reviewed, 12 charged activation fees ranging from $3 for the Walmart MoneyCard to $39.95 for the First Vineyard card.

-- Monthly fees. Sixteen of the 19 prepaid cards charged monthly fees ranging from $2.95 to $9.95. Most prepaid card issuers will waive the monthly fee if you set up direct deposit from your paycheck or another source. In other cases, you'll need to keep a minimum balance or use your card frequently. For example, the Green Dot card charges a $5.95 monthly fee unless the consumer maintains a $1,000 balance or has 30 transactions.

-- Fees to get cash. Most prepaid cards allow you to withdraw money from an ATM, but you could pay for the privilege. All 19 prepaid cards charged fees for withdrawing cash from ATMs, ranging from 99 cents to $2.50 per withdrawal. Green Dot card holders get free withdrawals at in-network ATMs but are otherwise charged $2.50 per withdrawal, the report said.

-- Fees to find out how much money you have. Eighteen of the cards charge a fee to check your balance at an ATM, ranging from 45 cents to $1. BuyRight charges $1 to speak to a customer service representative, the report said.

-- Overdraft fees. Many prepaid issuers claim they don't charge overdraft fees if customers spend more than what's on the card. But 13 of the cards surveyed charge "shortage fees" if the card holder spends more than what's available. The card holder agreements didn't specify the amount of the fee, the report said.

Industry officials say competition in the prepaid card business has reduced overall fees. Wal-Mart's decision last year to lower and simplify its fees - the retail giant charges $3 to purchase, $3 to reload and a $3 monthly maintenance fee - forced other issuers to match or better those fees to remain competitive, Maher says.

Consumers "have got plenty of choices, and they can find cards that fit their idea of what's fair and appropriate," says Jerry Welch, CEO of nFinanSe, which charges a $2.95 monthly maintenance fee.

The Consumers Union report provides a good breakdown of fees charged by some of the most popular prepaid cards. It's at ConsumersUnion.org .