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On first glance, prepaid credit cards seem like an ideal payment type for those consumers who may be unable or unwilling to obtain a traditional credit card – teenagers, college students, and families struggling with poor credit as a result of damage wrought by the poor economy. As the name implies, these cards are a form of plastic onto which a prepaid amount of cash has been loaded. These cards are accepted everywhere that “normal” plastic is, and are swiped and signed for just like normal cards. Instead of a credit line, however, these cards have a spending limit of the prepaid card amount. The use of prepaid plastic has burgeoned in recent years as awareness of this product has become more widespread and consumers have become leery of predation by credit card lenders. Increasingly, consumer advocacy groups are becoming aware of and starting to warn consumers of the risks of using these products, which are not as harmless as one might think.

The Consumers Union published a report recently showing that prepaid credit cards may pose a major hazard to consumers’ finances, with “activation fees” ranging as high as one hundred dollars. Nor are high fees the only risk, the group claims. According to Michelle Jun, a Consumers Union staff attorney, prepaid credit cards “charge too much” for overall use, especially for the base of customers who are apt to be using them. As a whole, users of prepaid plastic are most likely to be living on a paycheck-to-paycheck basis. Consequently, they are probably less likely to be able to afford these fees than even other consumers. Jun stated that the average prepaid credit card costs about twenty-five dollars per month just for the privilege of consumers being able to use their own money.

The Consumers Union report sheds a fascinating new light on this form of payment, which has heretofore remained fairly obscure. Use of prepaid plastic had increased over thirteen percent in the last two years, with loaded funds topping two hundred forty billion dollars. The Consumers Union investigated and profiled eighteen different prepaid credit cards to compile the information for their report, which was commissioned jointly by the Consumer Federation of America and the National Consumer Law Center.

Of these eighteen prepaid credit cards, seventeen charged an activation fee. These charges are incurred any time the card is loaded from zero, which is to say when it runs down completely. These fees range from the reasonable (three dollars) to the ludicrous – ninety-nine dollars and ninety-five cents! Fifteen of these cards charged monthly fees as well, ranging from three to ten dollars. Some of these issuers were willing to waive the fees if consumers set up direct deposit of some of their paychecks into the card account(s). Every one of the cards charged some sort of ATM withdrawal fee for taking cash out of the card account. The minimum penalty was one dollar and fifty cents, and the maximum was two dollars and fifty cents – and this is on top of fees charged by the ATM operator for “foreign” withdrawals. Additionally, seventeen issuers charged fifty cents or one dollars just to check the card balance at an ATM!

The fee that I found most unbelievable and borderline criminal was the charge for customer service phone calls. One of the prepaid credit card companies charged one dollar per minute to speak with a customer service agent, and another charged an obscene three dollars per minute! (Not to be crass, but not even those sleazy 900 phone chat lines you see advertised on late night TV cost that much!) Other cards are a little more lenient, and only begin charging customer accounts after so many free phone calls. The report didn’t mention it, but I personally would be interested to know if consumers were at least paying for the privilege of speaking to American phone representatives, and not offshore wretches being paid pennies per hour to read scripts with thick accents.

Nickel-and-diming customers to death seemed to be a common theme with all the card issuers, except none of the fees were that reasonable! Eight of the eighteen prepaid credit cards imposed “inactivity” fees of up to ten dollars a month on consumers who didn’t use their cards enough, and ten charged “shortage” fines of anywhere from twenty-five to thirty dollars on those who used it too much. Basically, as I see it, these companies are looking for any way possible to steal away the funds that consumers have loaded onto the plastic – their OWN cash, by the way.

Customers who are able to get a debit card branded by Visa or MasterCard through their bank would be much better served by this form of payment, in all honesty. Not only do prepaid credit cards come with all sorts of fees, but they also do not offer as many protections as debit cards do. Debit card protections are mandated by law, whereas any protections offered by prepaid credit card companies are strictly voluntary, and could theoretically be withdrawn without customer notification at any time. Customers, therefore, do not enjoy truly adequate protections in the case of lost and/or stolen cards. Furthermore, the funds deposited on cards may not be insured by the FDIC for insurance in the case of bank failure. Banks claim that customers can use these products to build their credit, but this might not even be the case. There’s no proof that any of these cards actually report to reputable credit bureaus – some report solely to lesser credit bureaus (not Equifax, TransUnion, or Experian), and some do not report at all… meaning that consumers are doing nothing for themselves by holding these cards with the hopes of building credit history.

The push has begun to convince Congress to regulate prepaid credit cards in the same way that they have passed restrictions on standard plastic. Consumer advocates would like to see caps on fees, and a restriction on the more shady charges such as the costs for customer service calls and ATM balance checks. Hopefully consumers will use caution when using these payment methods, and do their research to at least find the prepaid credit cards that are the best deal for their family and personal situation.