Every week, it seems, I throw away a pile of new credit card offers. But an offer from American Express caught my attention. It's called PASS, and it's marketed as a prepaid charge card that parents give to teens as a "safer" alternative to cash.
I can load up to $2,500 on the card, and Jason, my 18-year-old, can use it with certain restrictions. For instance, it's not accepted at liquor stores or casinos. That wasn't something I tended to worry about, but nevertheless, American Express bills the card as a "pass to peace of mind" for parents, and a "path to financial responsibility" for teens.
What the fine print doesn't pass on are details of its fees. So I called American Express.
What I learned is that there's no activation fee but there will be a fee of $3.95 per month — about $48 per year — starting Oct. 1, regardless of whether the card is used. There's also a fee of $1.50 each time the card is used to get cash at an ATM.
Prepaid, reloadable cards like this one are becoming more popular every year. According to the industry research firm Mercator Advisory Group, money put onto these cards is likely to increase to $202 billion by 2013, nearly five times the estimated $42 billion loaded in 2010.
Many analysts believe the growth will be fueled in part by the marketing muscle of big banks entering a business that, to date, has been dominated by small financial institutions.
Up to now, the cards have largely appealed to people who don't have bank accounts, or don't have credit ratings good enough for traditional credit cards. But their uses are becoming more mainstream.
The IRS will offer refunds to some taxpayers on prepaid cards. Retailers increasingly put product rebates on them. And some parents are giving them to teenagers as first steps toward financial independence.
Loaded with fees
The rapid growth of prepaid, reloadable cards is no surprise to Ben Jackson, senior analyst at Mercator in Maynard, Mass. For one thing, parents like the idea of using them to monitor their teens' spending and teaching budgeting, he said.
But like the Amex PASS, these cards typically come with an array of fees, so it's important to get the details.
In an analysis of 19 prepaid cards by the nonprofit Consumers Union, 12 charged fees for activating cards, 16 charged monthly fees, 18 charged fees for checking the balances at ATMs, and all 19 charged fees for withdrawing cash from ATMs. Other fees were detailed in the report, released in September.
Prepaid cards have so far largely escaped federal regulatory scrutiny. As a result, issuers are not required to provide the wide protections that consumers expect with credit cards. Any protections are voluntary and can be changed by the issuer at any time.
There's talk, however, that the new Consumer Financial Protection Bureau headed by Elizabeth Warren may call for public comments on how to increase fee disclosure by prepaid card issuers. It's unclear whether limiting fees would also be addressed.
Gail Hillebrand, a senior attorney with Consumers Union in San Francisco, says oversight of prepaid cards is sorely needed.
"What's going to happen if your teen loses a prepaid card or it's stolen?" she asks. "With a debit card, you have an absolute right to get that money back, but these products didn't exist when the Electronic Fund Transfer Act was written in the 1970s. This is a hole in the law."
There's another kind of prepaid card that has made its way to my home. It's a prepaid gift card, sent to my 12-year-old son, Alec, for his birthday. The card carries the Visa logo, so Alec could use it to make purchases virtually anywhere.
But if he doesn't spend the balance within a certain time period, he will lose $2.95 each month until the balance has been eaten up. Fees for other gift cards may be even higher.
Hillebrand says that for teenagers, there are better alternatives to prepaid cards. For emergencies and modest use, she suggests that an older teen apply for a credit card in his or her own name, with a low spending limit, as long as the teen can pay the full balance each month. She suggests that parents not cosign for the card; also, the teen will begin building that all-important record of good credit.
She also says it's best to get a card issued by a bank where your child has a checking or savings account.
After Jason and I talked about these options, he decided to open a checking account and fund it with the wages from his new part-time job. The bank will issue a debit card, in his name only, that will be tied to his checking account. This way, he can't spend more than the balance.
I've also given him a credit card — he's an additional user on my account — that he can hold in his wallet for roadside or other emergencies.
Carole Fleck is a senior editor at the AARP Bulletin.