The use of prepaid debit cards has surged since the 2008 recession, especially among Millennials. But a new study is warning fans of the prepaid card to read the fine print carefully and ask plenty of questions before signing up, as a disturbing number of companies are failing to disclose costly fees that could quickly eat through the card's balance.
A shocking seven out of ten prepaid debit cards are not fully disclosing their fees to consumers, according to a report released CreditCards.com.
"It was surprising, and it's troubling," said Matt Schulz, senior industry analyst at CreditCards.com. "So many people are running toward prepaid cards, because they don't want the hassles and fees that come with a bank account. But the problem is a lot of the cards come with their own fees and often are not disclosed properly."
The study reviewed fees printed on the packaging of ten popular prepaid cards sold at big retailers, drug stores and payday lenders. American Express Bluebird, American Express Serve and Green Dot Visa Gold were the only three cards that met the U.S. Consumer Financial Protection Bureau's proposed disclosure guidelines.
The CFPB introduced "know before you owe" proposals in November 2014 in an effort to beef up protections for consumers who use prepaid cards.
"Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts," said Moira Vahey, a CFPB spokesperson. "The Bureau is working to close the loopholes in this market and ensure prepaid consumers are protected." For now, the proposed guidelines are voluntary. But Vahey expects the CFPB to finalize the rules, making them enforceable, this summer.
The CreditCards.com study shows most firms are ignoring the proposed guidelines. The worst culprits were Payday lenders, ACE Cash Express (ACE Elite card) and Speedy Cash (Opt+ card), which didn't come with any fee disclosures unless the person requested them, said Schulz.
The fees can include monthly fees, activation fees, withdrawal fees, cash reload fees, inactivity fees, ATM non-network fees, balance inquiry fees, replacement card fees, foreign exchange fees, cash-out fees, signature purchase transaction fees, paper statement fees, bill payment fees, and even customer service call fees. All of these fees can quickly wipe out a card's balance without the consumer knowing it.
A user with Green Dot Visa Gold making 20 purchases a month, four ATM withdrawals and four cash reloads could pay as much as a whopping $35.75 in fees, noted Schulz.
"They're not regulated as well as other, more established type of products, so hidden fees are extremely common," said Jill Gonzalez, an analyst at WalletHub. "Consumers need to read the fine print."
The prepaid debit card market isn't small. About 25% of U.S. households used prepaid debit cards in 2014, according to a discussion paper released by the Federal Reserve Bank of Philadelphia in December 2015. Millennials were the biggest customers, with 60% of them having a prepaid card in 2014, up from 49% in 2013.
In 2012, roughly 12 million Americans used a prepaid card at least once a month, and the average card charged nine different fees, according to a 2015 CardHub report.
People use prepaid cards for a variety of reasons. Some see it as a low-cost alternative to a traditional checking account, where they don't need to keep large balances in their account to avoid banking fees, overdraft fees and bounced checks.
Others use the prepaid cards to take tighter control over their finances, since a card's balance will restrict the amount the person can spend on a trip, boys night out, or just everyday shopping. Often, young people use it when they don't have the credit history to get a traditional credit card.
Knowing the fee structure in advance is crucial for the cardholder to avoid costly fees being tacked in. For instance, a consumer could avoid non-network ATMs or cut back on balance inquiries to avoid fees.
"You shouldn't get one of these cards if you don't clearly know what the fees are that are involved," said Schulz, "because what you don't know can cost you a fair amount of money."
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.