With increased risk among consumers and conservatism among banks, the higher bar to qualify for a checking account is pushing a number of people toward prepaid cards. As a result, the use of prepaid cards rose by about 18 percent last year, according to a new study from Javelin Strategy and Research. "Because of the recession, people want better control of their money," says Beth Robertson, Javelin's director of payments research. "They want the ability to control their cash flow." Prepaid cards are typically marketed to young people who can't qualify for a standard credit card, or to people with bad or no credit history.
Despite some attractive features, a number of prepaid cards are loaded with excessive fees. Consumer Action, an advocacy group based in San Francisco, recently released a survey of the prepaid card market. After examining 28 cards from 11 issuers, the survey found fees for reloading money, ATM cash withdrawals, balance inquiries, and making a purchase without enough money on the card. There may also be a fee if you close the account or don't use the card for a few months.
Prepaid cards aren't covered by the CARD Act, which regulates credit cards. "There isn't any regulation on these cards, so they can come up with all kinds of fees," explains Beverly Harzog, Credit.com's credit expert. "You can get charged to death by fees with these cards." Without a system of checks and balances to monitor prepaid cards, Harzog says, "It's the wild, wild west right now."
Greg McBride, Bankrate.com's senior financial analyst, recommends that consumers first look into a low-cost or free checking account, and compare that with a prepaid card. "For most people, the checking account is going to be a better fit," he says. Anisha Sekar of NerdWallet.com, a credit card comparison site, also recommends a checking account over a prepaid card.
Harzog agrees that prepaid cards aren't the best option for most people, but says they're okay to use as long as you're working on getting back to a regular checking account or credit card. "With a prepaid card, you're spending money to use your own money, so it should be a short-term solution," she says.
If you're still intent on a prepaid card, choose one that will present the lowest total cost for your financial habits. U.S. News spoke to credit experts and identified the five best and worst prepaid cards on the market:
American Express Prepaid Card. Harzog likes this card because its fees are minimal (there's no fee for activating and reloading the card, for example) and the card now offers direct deposit. "The only problem with it is you pretty much need to have a bank account to link it to, and that makes it less useful for some people," says Liz Weston, author of Your Credit Score. Sekar, NerdWallet.com's vice president of credit and debit products, says this is the best card if you don't use ATMs often because it levies a $2 fee for withdrawals (the first ATM withdrawal each month is free).
American Express Bluebird Prepaid Card. With this option, you'll get the benefits of an AmEx card, such as 24/7 customer service, purchase protection, fraud protection guarantees, roadside assistance, and access to discounts for entertainment events. "Most prepaid cards don't offer these things other than customer service," Harzog says. "And too often, there's a charge for that." You can load the card via direct deposit or from another bank account. And there are no monthly fees.
Green Dot Card. The fee plan is simple and upfront, Harzog says. You won't get slapped with an activation fee if you order the card online (you could pay up to $5 if you purchase it in the store). The monthly maintenance fee is $5.95, but you can get out of that if you have at least 30 purchases per month or load more than $1,000 onto the card. There's also no ATM charge, which is a common fee on prepaid cards.
The Approved Card from Suze Orman. Harzog says the fees on this card are minimal. "The only thing I don't like is there's no way to get out of the $3 monthly maintenance fee," she says.