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Receptionist Erin Gamboa holds her Green Dot prepaid debit card Tuesday June 14, 2011 in Monrovia, Calif. Gamboa closed her Chase bank account last December, frustrated the bank's high fees, and later became one of the 3.4 million Green Dot users. (AP Photo/Damian Dovarganes)
Report warns consumers about prepaid cards
First Published Jul 31 2013 08:49 am • Last Updated Jul 31 2013 04:36 pm

Prepaid cards have become the go-to alternative to traditional bank accounts and credit cards, yet many still have hidden fees and lack basic safeguards, exposing consumers to risks that could leave them financially devastated.

A report released Tuesday by Consumer Reports reveals the dangers of using some prepaid cards, the plastic cards you can load and reload without a bank account.

Photos
At a glance

Consumer reports rates best and worst prepaid cards

Best:

Bluebird with direct deposit (American Express)

H&R Block Emerald Prepaid MasterCard

Green Dot Card (Green Dot Bank)

Approved Prepaid MasterCard (Suze Orman)

Worst:

AccountNow Gold Visa Prepaid Card (MetaBank)

Reach Visa Prepaid Card (Tom Joyner)

Redpack Mi Promesa Prepaid MasterCard

American Express for Target

Source: Consumer Reports, July 2013

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Because more consumers have bad credit or are trying to avoid credit card debt and bank fees, prepaid cards have grown in popularity. Yet the industry remains largely unregulated and devoid of the protections that most bank accounts and credit cards offer, prompting concerns that more than one-third of American households may be vulnerable to shady prepaid card practices.

"Depending on what you’re planning on using the prepaid card for it could be completely useless," said Odysseas Papadimitriou, CEO of CardHub.com, a credit card education site. "You could end up spending a bunch of money and not get what you need."

Consumer Reports reviewed 26 prepaid cards and ranked them based on hidden fees, ongoing monthly fees, whether they can be used at ATMs, protection against fraud or bank failure and transparency about their policies and services. Some cards charge users high fees for "inappropriate" reasons such not using the card, needing a replacement card or calling customer service, according to the report.

With some prepaid cards, there’s no guarantee you’ll ever get your money back, said Michelle Jun, a senior attorney at Consumers Union.

"If someone steals your wallet, it’s pretty much up to the company," Jun said. "But you can’t point to a federal law or regulation to save you."

Cards such as the American Express for Target, which Consumer Reports ranks last, have no protection through the Federal Deposit Insurance Corp., the federal agency that insures bank deposits.

Not all prepaid cards are risky. Jun said many companies have added insurance, lowered their fees and improved their policies so they function nearly the same as a checking account.

Prepaid cards have become more popular since the financial crisis, particularly among low-income consumers who may not quality for a checking account and young adults wary of big banks and debt. By the end of 2014, prepaid card users in the United States are expected to add $167 billion to their accounts, a 42 percent increase from in 2010.


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The federal Consumer Financial Protection Bureau is cracking down on unfair prepaid card practices, and last year asked for input from consumer groups to ensure that consumers’ funds on prepaid cards are safe and that card terms and fees are transparent.



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