Prepaid debit cards are everywhere, but are they for you?

Woman holding array of cards

In the wake of financial reform, banks have raced to tack on new fees just to use a basic checking account.

So, more of us are turning to an alternative: prepaid debit cards.

This market is large and growing fast.

According to the research firm Mercator Advisory Group, Americans placed $28.6 billion onto reloadable prepaid cards in 2009. By 2013, that figure is expected to reach $201.9 billion.

But just because lots of people are racing to get a prepaid card doesn't mean you should, too.

Many prepaid cards come with big fees, meaning a debit card tied to a low-cost checking account is still the best option for most people.

Prepaid cards are good for those who can’t qualify for a checking account or who tend to overdraw their account.

Before signing up for one, first figure out how much spending you do every month, and how often and where you would use the card, as that can impact how much you'll pay.

Then do some comparison shopping.

How they work

The concept of prepaid debit cards is simple. You load cash onto the card and then use it like any other debit or credit card.

The money you load is held in an account managed by a bank. You can repeatedly replenish your card by depositing more money at an accredited agent or by having paychecks direct-deposited into your account.

Prepaid debit cards have the owner's name embossed on the front, just like a traditional debit or credit card and can be used to:

Unlike debit cards attached to a checking account, prepaid debit cards are rejected if you try to spend more money than is in your account. So there are no overdraft fees.

The card issuers say they're safer than carrying around cash.

And because they usually bear familiar logos like Visa, MasterCard or Discover, they are often indistinguishable from those other cards at first glance.

But the similarity ends there.

High fees, limited protection

The main drawback is all the fees.

A big reason why more financial institutions are moving into this market is that prepaid cards are not restricted by the Dodd-Frank financial regulation law enacted by Congress in 2010.

That exemption means issuers are able to charge merchants higher fees when a consumer swipes a prepaid card.

And they can charge you a fee every time you use one at a store, withdraw cash from an ATM, talk to a customer service rep or even put more money into your account.

For example, customers with a "convenient cash" prepaid card from U.S. Bank pay a $3 fee to enroll, a $3 monthly maintenance fee, $3 to visit a bank teller and $15 to replace a lost card.

Wells Fargo charges $1 to speak to a customer service agent more than twice a month, $3 for customers to withdraw money using a bank teller and $5 to replace a lost card.

Suze Orman’s Approved card is promised to be better than the rest, but usage fees add up there, too.

You can speak with a customer service rep free of charge just once a month, and each call afterward is $2.

While you can pay bills electronically with the card, paying by paper check costs $1 per payment.

Although you might prefer the single-digit fees on these cards over the potential of a $30-plus overdraft fee on your checking account, you have far less protection from the federal government.

The new Consumer Financial Protection Bureau is considering regulations, but for now, prepaid debit cards lack FDIC insurance, and card issuers are not required to disclose fees.

And if you think a prepaid card can help you establish credit, proceed with caution.

Some prepaid cards now offer "credit building" and small lines of credit.

But a March study by Consumer Reports showed they don’t build the type of credit report that consumers get with mainstream credit cards, and their short-term credit lines come with much higher rates and fees.

Orman’s card offers users unlimited access to their TransUnion credit report and score for one year. However, the score you’ll receive is called a Vantage Score, not your FICO score, which is the score most lenders use to evaluate you as a credit risk.

Where to find the best deal

The key to finding a good card is avoiding the most costly and frequently incurred fees.

That means you need a card that charges:

So, where can you find a reasonable prepaid debit card?

The Walmart MoneyCard charges reasonable fees -- and talk about convenience. You can reload the MoneyCard at any store.

We also like American Express' prepaid card, which allows free direct deposits each month of up to $5,000.

Or sign up for the Mango MasterCard Prepaid Card (www.mangomoney.com). There's no activation fee, no transaction fee and the $5 monthly fee is waived as long as you deposit at least $500 every month on the card.

If you sign up for free direct deposit, you get a $20 bonus, and you can direct a portion of your money into a Mango Savings account, which pays 6% APY on balances up to $5,000.

Try to find savings account rates that offer anything close to that yield these days.

Worth checking out is Chase Liquid, which JPMorgan Chase is launching this summer and promising some of the lowest fees out there without signing up for a full-service bank account.

The monthly fee is $4.95, but there’s no charge for customer service or deposits and withdrawals at Chase branches.

Another option is to take advantage of the prepaid debit cards employers offer in lieu of paychecks or that governments use for Social Security or unemployment benefits.

They almost always provide lower fees and extra benefits than most debit card providers charge individual users.

Take, for example, the Direct Express Debit MasterCard, which the federal government is using to replace Social Security checks.

Direct Express cardholders get one free ATM withdrawal a month at a specially designated network of 56,000 machines and pay just 90 cents for all other withdrawals.

They can also go to any MasterCard member bank and use the card to get cash from a teller without paying a fee.