What's in your wallet? For a growing number of consumers, the answer is a prepaid debit card.
One of the fastest-growing segments of the financial services industry, reloadable prepaid debit cards appeal mainly to people who can't get a credit card or bank account, find them too costly or simply don't like dealing with banks.
Some people use them instead of carrying cash while traveling. Others use them as a budgeting tool to help limit how much they spend. Parents may give them to their children to use while away at camp or school.
But as the cards grow in popularity, more people are experiencing their pitfalls, too.
For one thing, while the cards look like traditional debit cards tied to a bank account, they don't carry the same safeguards against fraud.
And disclosures also often are lacking, blindsiding some users with a bevy of hidden fees.
"These cards are laden with numerous types of fees and other gotchas, making prepaid cards a shaky alternative to a bank account with a debit card," Consumer Reports magazine said in a report on the industry released last week.
Competition is beginning to bring down some fees, the report noted, but the costs aren't always disclosed up front and can still add up quickly.
Fees vary widely from card to card. Some of the more common charges include activation fees, monthly fees, ATM fees and balance inquiry and statement fees. Other fees may include charges for transactions at the register, calling customer service, using the card to pay bills, leaving an account inactive or getting remaining funds when closing the account.
And while consumers can load more money onto the cards electronically for free -- say by direct deposit of a paycheck, Social Security benefits or other recurring income -- "reload packs" offered at convenience and grocery stores carry a fee.
Consumer Reports compared the costs of several prepaid debit cards using a sample customer making a certain number of purchases, deposits, withdrawals and other transactions to see what it would cost to use each card for two months.
In one matchup, it found the Walmart MoneyCard would cost $38.13 without direct deposit ($16.59 the first month and $21.54 the second), or $20.28 with direct deposit ($11.64 the first month and $8.64 the second). That compared with $43.80 and $29.45 using the AccountNow card.
The best way to limit fees is to research them before selecting a card, experts say.
But Michelle Jun, staff attorney and author of the Consumer Reports study, said it's often not easy for consumers to know what they are getting into.
"Consumers typically can find information on only a few of the fees charged by card issuers before deciding to sign up, purchase and use prepaid cards," she said.
Retail displays may only show activation fees and initial load amounts, she said.
Some card issuers also make finding complete fee information online difficult by requiring several clicks and careful inspection of the fine print.
"If a consumer purchases a card online, the fee information should be on the home page. If purchased at a retail location, fees should be disclosed on the outside of the packaging," Jun said.
Users also should be wary when a card issuer touts a card as a way to help build a person's credit history, Jun said.
"The three large credit bureaus that most creditors go to aren't using debt transaction information when they (calculate) scores," she said.
People using prepaid debit cards also may be at a disadvantage when it comes to consumer protections, she said.
Visa and MasterCard both advertise zero liability policies on cards that carry their network logos. Cardholder agreements that come with other cards, such as Walmart's MoneyCard, also may carry protections.
Jun said the protections are voluntary and include loopholes.
For example, the Visa and MasterCard policies don't cover ATM transactions, she said. So if a thief were to skim a cardholder's account information at an automated teller machine and steal money from the card account, the cardholder would be out the money. The zero liability policies also do not cover PIN-based transactions (vs. signature-based) at the register, she said.
In most cases, a better option would be using a traditional debit card tied to an account at a bank or credit union, said Greg McBride, senior financial analyst at Bankrate.com.
"For most people, a low-cost or free checking account is going to be a better alternative than a prepaid debit card," he said.
Consumers Union, publisher of Consumer Reports, supports a bill introduced in December by U.S. Sen. Robert Menendez, D-N.J., that would force prepaid card issuers to disclose all fees before a card was purchased, limit or eliminate some fees and offer some protections against fraud.
The new federal Consumer Financial Protection Bureau also is reviewing the industry.
Distributed by Scripps Howard News Service.