Clearly, not all prepaid cards are created equal. Determining if you need a prepaid card — and which one would be right for you — means reading the fine print on all kinds of fees and services. Be prepared; it's not always easy.
The cards are often touted as an alternative plastic for the 43 million consumers who have little or no banking relationship, either because they don't trust banks, don't have easy access to one or have a history of bounced checks that prevents them from qualifying for an account. Federal and state governments now use prepaid cards to pay some benefits, while some employers have adopted them in lieu of paychecks.
But much of the growth in the future is expected to come from general-purpose reloadable cards purchased by consumers, such as the Walmart MoneyCard, Green Dot and Simmons' RushCard.
In 2007, consumers loaded $12 billion on these cards and are projected to add nearly $202 billion onto the plastic in 2013, according to Mercator Advisory Group, which tracks the cards. The total market for cards that can be reloaded is expected to exceed $420 billion in three years.
Industry experts say prepaid cards are increasingly appealing to a broader audience that uses them for budgeting. Consumers put only the amount on the card that they want to spend.
"They are going up-market now," says Brent Watters, a senior analyst with Mercator, noting that households with six-figure incomes are buying prepaid cards.
One of the latest prepaid cards is the Treasury Department's pilot program to deliver tax refunds on plastic. The government is asking 600,000 low- to-moderate income taxpayers to sign up for the MyAccountCard, which will allow them to get refunds faster than with a paper check.
The pilot will test different fee structures, although any charges would still be less than what you get with most prepaid cards that you can buy. Some tax filers will also be offered an interest-bearing bank account.
This is a good move by Uncle Sam. It will help some filers avoid check-cashing fees and may prevent others from taking out pricey refund anticipation loans to get refunds more quickly.
But consumers beware — some prepaid cards come with serious drawbacks.
Many don't have the same regulatory protections as a debit card, consumer advocates say. Report a stolen debit card within a certain period, for example, and your losses from unauthorized transactions are capped. (Government and payroll prepaid cards do have those mandated protections.)
But the Network Branded Prepaid Card Association, made up of major players, says its members offer similar protections.
Prepaid cards can also carry hefty and numerous fees. Legislation was introduced in Congress late last year to ban fees for inactivity, customer service and balance inquiries, and to protect funds loaded on a card in case it's stolen or the company selling it goes bankrupt.
A Consumers Union report last fall found more than half of 19 cards surveyed carried activation fees ranging from $3 to $39.95. Most assessed monthly fees from $2.95 to $9.95; half included an inactivity fee, and all charged for ATM withdrawals. Some cards listed a "shortage" fee that would be triggered if you spend more than the amount on the card.
Even though competition has intensified, that hasn't brought down fees or led to any standardization, says Suzanne Martindale, associate policy analyst with Consumers Union. "The fees still vary so widely from card to card," she says.
The poster child of fees-gone-wild is the now-defunct Kardashian Kard, introduced in November and targeted at teens. Outcry over the fees was swift and intense. The Kard charged an upfront fee of $99.95 for the first year, and $7.95 a month thereafter. It was loaded with many other fees — including one for cancelling the card.
The Kardashian sisters quickly terminated their endorsement after just three weeks and have been sued for breaking their contract.