I listened to your recent segment on overdraft fees and debit cards. I have bad credit, which has made it difficult for me to open a checking account or get a credit card. But I was planning on getting a pre-paid debit card so that I don’t have to carry around a lot of cash. What are your thoughts on these types of debit cards?
Lamar, Detroit, MI

Issued by little-known firms like Green Dot, NetSpend and AccountNow, but often emblazoned with a Visa or Mastercard logo, pre-paid debit cards have become increasingly popular. In 2008 alone, customers loaded approximately $8.7 billion on pre-paid debit cards, a 125 percent increase over previous years. You can find them just about anywhere – from grocery stores to big box retailers to check-cashing stores. And, because these cards are marketed as “no credit check required” and “no bank account needed," they are viewed as an attractive and convenient option to individuals, like Lamar, who do not have a bank account or qualify for a credit card.

However, as the old adage goes, you pay for convenience. While you may be able to avoid those pesky overdraft drafts associated with bank issued debit cards, pre-paid debit cards often come with a host of other fees - including activation, maintenance and purchase fees, just to name a few. 


So, how exactly do pre-paid debit cards work?

A prepaid debit card looks very much like a traditional credit or debit card, and you use it in the same way. However, with a pre-paid card, you load money onto the card, as opposed to drawing money from your bank account, like with a traditional debit card or borrowing, like with a credit card. The good news is that this pay-as-you-go option prevents you from accumulating debt and forces you to set spending limits. And, when the money runs out, you can simply choose to reload the card again. 


When and how do the fees come into play?
 
When your purchase a pre-paid card, you are usually charged an activation free upfront. The amount of this fee varies greatly, but it is usually under $20 and sometimes as low as $3, like with Wal-Mart’s MoneyCard. But, after you have activated and loaded the card, you may be subject to a whole host of recurring fees. 

For example, the MiCash Pre-paid Mastercard charges $1.75 for each ATM withdrawal, $1 for each ATM balance inquiry, $0.50 for each purchase, $4 for monthly maintenance, $2 for inactivity after 60 days and $1 for a call to customer service. All of these fees add up and, depending on your spending habits, can take a big bite out of the amount of money you loaded onto the card. 


Why aren’t pre-paid card issuers being forced to change their ways like credit card issuers? 

Unfortunately, because this is a relatively new industry (10 years ago, it was just a cottage industry), there is little to no regulation right now, so consumers are at the whim of issuers. The terms of these cards can be murky at best, and fees are often hidden in fine print, so customers may not understand when and where they are charged fees. And, if you go looking for answers, you may find that customer service is limited, not to mention that you may have to pay an additional fee for it! 


So, is your advice to just avoid these cards?

Well, depending on your circumstances, you may not be able to avoid them. With companies and governmental agencies searching for ways to cut costs, many are turning to issuing paychecks through pre-paid cards, as .....

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