Study exposes risks of prepaid cards

People who don’t qualify for or want a bank account are vulnerable to scams and poor business practices from a variety of sources. Payday lenders and providers of car title loans have come under scrutiny recently from local and state governments. Now, another tool often utilized by the “unbanked” has garnered attention.

A study from Pew Charitable Trusts suggests that consumers should be wary of prepaid credit cards. Such cards work like a debit card; consumers pay a certain amount to the company issuing the card, and the card carries a limit equal to that amount minus fees.

According to the findings from focus groups conducted by the Pew Safe Checking in the Electronic Age Project, consumers are expected put more than $201.9 billion on prepaid cards in 2013. However, the Pew Center warns, these cards come with high fees and other risks.

Consumers in the focus groups often turned to prepaid cards in order to avoid unexpected fees from banks. But, they also complained about the number of fees associated with prepaid cards, including “an initial fee to purchase, subsequent fees for reloading funds, monthly fees, a replacement fee for lost cards, a fee to use ATMs, and a fee to call customer service.”

The study, which looked at 52 cards covering 75 percent of the market, found that prepaid cards come with seven to 15 different fees. Also, for those who purchased a prepaid credit card as a means to control spending, the study pointed out that overdraft protection offered by many lenders was counter-productive.

In addition, there are significant risks to purchasing a prepaid card. For instance, prepaid credit cards “are not covered by laws requiring disclosure of fees and terms – nor those that limit consumer liability for unauthorized electronic fund transfers.” This means that consumers may get hit with unexpected fees, and may be liable for the full amount in cases of fraud.

And, while the Federal Deposit Insurance Corporation does sometimes cover money placed on prepaid credit cards, the study warned that this is not always true. According to the findings, “those companies that claim funds are FDIC-insured are not federally supervised and, therefore there is no guarantee the protections are executed correctly.”

BBB offers the following advice to consumers interested in a prepaid credit card:

  • Start with trust. Check the company’s BBB Business Review before purchasing a prepaid card. Find an accredited issuer using BBB’s Member Pages.
  • Read the fine print. Read the card member agreement thoroughly before paying any money. Pay special attention to the number and amount of fees. Are you charged for withdrawing your money? Talking to a customer service representative? Is there a fee for not using your card for a certain amount of time?
  • Avoid upgrades. If you’re using a prepaid credit card to control spending, skip extras like overdraft protection and additional credit lines. Most come with high fees and can encourage overspending.
  • Watch your account. Because many prepaid credit cards offer little to no fraud protection, you have to be extra diligent in monitoring your account. Watch for unexpected payments or withdraws and report them immediately to your card issuer.