To provide greater protection to consumers, the Consumer Financial Protection Bureau last year issued new disclosure rulings on reloadable prepaid debit cards. At issue was the potential for hidden and confusing fees, and what consumer advocates call a lack of basic protections.
See also: 6 places to never use a debit card
From 2009 to 2012, the number of reloadable cards in use in the United States doubled, from 3.4 million to 7 million. And the growth continues, with a prediction that by the end of 2014, U.S. consumers will have $167 billion loaded on these cards.
Why the growing affinity for these cards? One reason is that banks have made a big push into the market for these cards, in part because they are less regulated than credit and debit cards.
Prepaid card providers most often market to people who don't have credit cards or checking accounts — often low-income people and students. The cards are promoted as a way to manage money without incurring debt and surprise overdraft fees. However, consumer advocates contend that many issuing companies do not provide clear and complete information about their cards' usage and maintenance fees.
Keeping Fees Low
Even with better regulation now in place, it's up to you to compare fees and read the fine print closely if you decide to get a reloadable prepaid debit card. Here are seven steps toward getting the best deal.
1. Minimize initial purchase or setup fees. Some cards are free to acquire, but some have an initial purchase price or activation fee. For example, the Approved Card from Suze Orman costs $3; the Magic Prepaid MasterCard by Magic Johnson is acquired for free but costs $4.95 to set up; the AARP Foundation Prepaid MasterCard brought to you by Green Dot is free if you obtain it online but can cost $4.95 in retail stores if there is no special offer.
2. Take action to limit monthly fees. The Approved Card from Suze Orman has a $3 monthly fee, the Magic Card has a $4.95 monthly fee, and the AARP Foundation Prepaid MasterCard charges $5.95 per month. There may be ways to avoid maintenance fees. The AARP Foundation Prepaid MasterCard will waive the monthly fee if you make a $250 direct deposit, post 30 transactions or load $1,000 onto the card during the month. The Approved Card from Suze Orman will give you the first month free, but after that it does not offer waivers. The Magic Card will not waive the monthly fee.
3. Use ATMs wisely. You'll generally avoid ATM fees if you stick to machines on your card's network and pay attention to other fine points of your card's ATM rules. The AARP Foundation Prepaid MasterCard offers free use of the 20,000 ATMs of the MoneyPass network, but charges $2.50 for out-of-network ATMs. The Magic Card allows free use of 77 ATMs owned by OneWest Bank; the first two uses of an out-of-network ATM are free each month, but after that they cost $2.50 per use. The Approved Card from Suze Orman allows free use of machines on the Allpoint ATM nework within 30 days of a bank transfer or a $20 direct deposit; out-of-network ATMs are $2 per use.
Related: When debt can be useful
Also, the cards will charge you if you use an out-of-network ATM to check your balance — 50 cents with the Magic Card and AARP Foundation Prepaid MasterCard card and $1 with the Approved Card. The company that owns the ATM may levy an additional fee.
4. Look for fee disclosure. Some cards print their fees only on the inside of the package, so you don't know what the costs are until after you buy the card. Others list fees on the outside of the package or online. For example, the AARP Foundation Prepaid MasterCard lists the fees on the back of the package. You can't buy the Magic Card or the Approved Card at retail stores — you have to order them online at www.onlymagiccard.com and theapprovedcard.com — but you can view their fees online before purchasing a card, as you can with the AARP Foundation Prepaid MasterCard.
5. Watch out for special purchase fees. Some cards charge a fee for certain types of purchases at retail locations. For example, the RUSH card's Monthly and Pay as You Go programs charge $1 for point-of-sale transactions that require no signature but not for ones that do. The Magic Card, the Approved Card and the AARP Foundation Prepaid MasterCard do not charge this fee for either type of transaction.
6. Be careful how you reload the card. Adding money to your card via direct deposit or electronic transfer is free on many cards, including the three compared in this article. All three cards let you load cash at retail locations, such as Western Union and MoneyGram, at a cost of up to $4.95 each time. The AARP Foundation Prepaid MasterCard also allows you to load cash via a Green Dot MoneyPak, which costs $4.95 and acts like a gift card: You load cash onto the MoneyPak (typically up to $500 at most retailers) when you purchase it, and then, via a website or an 800 number, use the MoneyPak's PIN or ID number to transfer the money to your prepaid card.
7. Make sure your card has FDIC protection. One more suggestion: Make sure that your prepaid card offers FDIC insurance — not all cards provide this critical benefit. But if yours does, and you are named as the cardholder, your account balance is protected up to the maximum allowed by law should the bank holding company fail. All the cards mentioned in this article offer FDIC insurance.
You can compare cards by reading the fine print, visiting CreditCards.com, a card-industry site, or using NerdWallet's comparison tool, which also allows you to assess the costs of reloadable prepaid debit cards against having a checking account.
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