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Beware the Dangers of Prepaid Cards

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These days, many Americans rely on prepaid debit cards to help them deal with some or all aspects of their financial lives, but experts have routinely questioned whether such accounts are as beneficial as they seem.

Prepaid cards are often marketed as an alternative to banking, which has seen fees increase considerably in recent years and effectively priced out many low- or even middle-income consumers, according to a report from Pew Charitable Trusts. And that tack has proven successful for issuers, as by 2013, the amount loaded onto these cards annually could climb to about $201.9 billion, up from just $28.6 billion in 2009.

However, despite being marketed as an effective and low-cost alternative to traditional bank accounts, the study found this may not always be accurate. The 52 most popular prepaid cards in the country — which make up about 75 percent of the total marketplace — disclose between seven and 15 different fees per account, and in a percentage of these cases, they may not disclose what some of those fees are. However, some cards can disclose as many as 21 to 24 or as few as between one and three.

The total combined cost of all these fees can be quite costly, the report said. For instance, the median monthly fee for such a transaction is $5.95, and those for opening the account are about $9.95. But overall, the median cost of most fees associated with such an account is usually less than $3. Nonetheless, they can add up quickly.

Further, while the cost of some of these prepaid accounts can be lower than those related to checking accounts, they can also come with more risk, the report said. For instance, the Federal Deposit Insurance Corp. does not back the balances on all of these cards, meaning that there might be little protection if something were to go wrong with their balance.

Because of the high cost of opening and maintaining a prepaid account, many consumers may be better off doing some math to compare the overall expenses they will face for using such a card, versus those from a traditional checking account. Due to the lack of uniform disclosures, this may not always be easy, but it can help some get a better handle on their finances for the lowest cost available to them.

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