A card with credit is not always a credit cardYou might think that the term "prepaid card" contains a clue as to the nature of this particular form of financial product. Surely, "prepaid" implies that you have to spend your own money. Silly you. A number of prepaid card issuers -- including Netspend, the nation's second largest -- have begun to introduce various types of overdraft or credit facilities for their customers. Not surprisingly, many consumer groups are appalled. In July, the National Consumer Law Center, the Center for Responsible Lending and the Consumer Federation of America teamed up to lobby the federal Consumer Financial Protection Bureau to ban the practice. In their formal submission, they claimed that lines of credit offered with prepaid cards " are a means of evading credit laws." The document went on: "The cards have been used to circumvent state and federal laws, often in partnership with payday lenders." Even leaving aside possibly usurious interest rates, prepaid plastic can pose dangers to consumers, not least because the sector is largely unregulated and was completely excluded from the Credit CARD Act of 2009.
Risks of using faux credit cardsThe Pew Charitable Trusts published a report on general purpose reloadable (GPR) prepaid cards on Sept. 6, which was based on a study of 52 such products that together account for at least 75 percent of the market. It also urged a ban on the offering of credit, and also identified five key risks that some users may face:
- A large number of types of fee -- Most of the prepaid cards examined had between seven and 15, making it difficult for consumers to choose the best product.
- Wildly varying costs -- Pew found that the monthly median cost of the fees it tracked ranged from $0.50 to $9.95.
- Lack of transparency -- There's no law to oblige card issuers to disclose their fees upfront. You may not know that you're liable for one until it appears on your statement.
- Lack of fraud protections -- Your liability may not be capped if a fraudster makes unauthorized transactions.
- Lack of Federal Deposit Insurance Corporation cover -- Some issuers may not have the proper FDIC cover that would protect your funds were they to go bust.