Know the hidden costs involved in prepaid cards

Tuesday, October 5th, 2010

There is not much of a difference when it comes to payments in prepaid debit cards as well as the regular debit cards. Both these cards can be reloaded. This is a good deal especially for consumers who are careful spenders and for people who budget their expenses. But there is a word of caution here too as the costs are higher than the average credit card or debit card, whereas the protection offered is much lower.

In a recent survey done by Consumers Union, the terms & conditions of almost 19 cards (prepaid cards) were reviewed and it was found that consumers were being charged higher fees at multiple levels irrespective of which card they owned.

Every prepaid card pretty much has the same monthly fee due to the way the product is structured in terms of revenue. These cards don`t really have too many ways to make money out of the cardholder.

Hence the only way they can earn profits is structuring the high fee, which is unavoidable. These cards are highly dependent on the fees.

Out of the 19 cards reviewed by Consumers Union, 12 of them charged an activation fee of about $39, while 16 of them charged monthly fee of about $2-$9. Withdrawing cash from an ATM was being charged by all cards, and 18 of them even charged for doing the balance enquiry at the ATM.

In spite of getting the feeling of being bombarded from all sides, prepaid cards are still worthwhile as they are practical in their use. Customers who cannot avail the regular credit card and for someone who wants to use the card cautiously, prepaid cards are a boon especially since it is not always feasible to carry huge amounts of cash and it is not practical.

But the flipside to owning a prepaid card is that the protection it offers may not be the same as in case of a regular debit card. In case of the card getting stolen, lost or used fraudulently, the money may not be recovered. In the event of such a happening, the issuer has to intimate within 2 working days. In case it is reported quickly the liability could be just $50 but it could go up to $500 if reported after 48 hours have passed. Since most of these cards are not FDIC insured, funds may not be recovered in case of a bank failure. These cards also don`t help in building credit. This also could be a disadvantage for users.

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