NEW YORK (MainStreet)Prepaid cards represent the fastest growing segment of the payments industry and can be used to pay bills, make purchases or withdraw cash from ATMs. In 2012, prepaid cards were used 1.6 billion times for $77 billion worth of transactions, according to Consumer Reports.
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"Not all prepaid cards are created equal," said Michelle Jun, senior attorney with Consumers Union.
Fee information is often hard to find and prepaid cards still lack the same safeguards guaranteed by law that consumers get with traditional debit cards, but for the first time ever, Consumer Reports ranked the best and worst prepaid cards based on value, convenience, safety, and how well fees are disclosed to consumers.
"The good news is that prepaid card fees have come down and a number of cards offer many of the same features you get with a bank account," said Jun.
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The top five cards reviewed by Consumer Reports are the Bluebird card with direct deposit, H&R Block Emerald Card, Green Dot Bank Issued Prepaid card, Approved card with direct deposit and the Approved Card without direct deposit.
"These cards have fewer fees and make it easier for consumers to avoid them, carry FDIC insurance, offer features comparable to traditional checking accounts and and do a better job of disclosing fees," Jun said.
In fact, prepaid cards offered by some of the big banks are not necessarily cheaper than other prepaid cards and may be less attractive to consumers, because they don't provide the option of making both electronic payments and payment by paper check, according to Consumer Reports.
Among the cards that scored the worst were the Account Now Prepaid Gold Visa (Meta Bank), The REACH Card from Tom Joyner, Redpack Mi Promesa Prepaid MasterCard and the American Express for Target prepaid card.
All of the worst cards have high, unavoidable fees, including activation and monthly fees. Moreover, consumers are likely to have a difficult time finding and understanding those fees.
"Consumers can still end up paying more than they bargain for because fees are often poorly disclosed and can pile up quickly," said Jun.
Last year, the Consumer Financial Protection Bureau (CFPB) announced that it was beginning to consider new rules to protect consumers who rely on prepaid cards. Consumers Union, the policy and advocacy arm of Consumer Reports, has urged the CFPB to limit unfair prepaid card practices, improve fee disclosure and require card issuers to abide by the same mandatory legal protections that cover debit cards linked to bank accounts.
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"It's time for consumer protections to catch up with this fast growing new way to pay," said Christina Tetreault, staff attorney for Consumers Union. "The CFPB should rein in abusive prepaid card practices and require clear disclosure of all fees. Prepaid cards should come with guaranteed federal safeguards that protect consumers from losing their money because of fraud or merchant mistakes."
Until new rules and limitations are in place, consider the following tips:
- 1. figure out what fees will be charged
- 2. Before activating it, determine how you plan on using the card.
- 3. Select a card that has all of the features you need and that is offered at a cost that fits your budget.
- 4. Avoid using prepaid cards to buy gas at the pump, pay for hotels or rental cars because these transactions can trigger extra holds on your prepaid card funds.
- 5. Consider using a regular checking account since it comes with a traditional debit card and stronger legal safeguards to protect you from losing your money from fraud or merchant mistakes.
--Written by Juliette Fairley for MainStreet