Even though prepaid debit cards are increasingly popular, many are carrying hidden fees that could prove painful for consumers.
Only three out of 10 surveyed prepaid cards fully disclose their fees, according to a new survey from CreditCards.com. The study researched the fees printed on popular cards sold at large retailers, drugstores and payday lenders. Unfortunately, in many cases consumers could end up spending hundreds of dollars annually in unwanted fees.
About 12 million Americans are using prepaid debit cards each month, mostly because they want to get control of their finances, according to a 2014 Pew Charitable Trusts report. Because prepaid cards aren't credit cards -- you can't spend beyond the amount that's loaded on the card -- they can be appealing to consumers who want to avoid getting into debt.
But they also tend to attract consumers who are young and have lower-than-average incomes, so any additional fees could take a big bite out of their budgets.
"A lot of people are rushing toward prepaid cards because they don't want the hassle and fees that come with a bank account, but a lot of these cards come with their own fees, and they often aren't disclosed properly," said CreditCards.com senior industry analyst Matt Schulz. "What you don't know can cost you a lot of money."
A consumer with a Green Dot Visa Gold who makes 20 purchases a month, four ATM withdrawals and four cash reloads could spend as much as $35.75 a month in fees. People with the ACE Elite Card could shell out $45 a month on a similar basis, Schulz said.
But knowing the fee structure can make a huge difference. For instance, by avoiding out-of-network ATMs, a consumer can cut down on fees. But two of the 10 cards surveyed -- the ACE Elite Card and the Opt+ card --failed to disclose the out-of-network ATM fee, the study found.
Given the high costs of prepaid debit cards, it may be better in the long run for many of those consumers to open a bank account, Schulz said. Some prepaid debit cards charge $1 for every purchase and add fees for balance inquiries or declined transactions, not all of which may be clear to the consumer.
About one out of four American households are either unbanked -- meaning they don't have a bank account -- or are underbanked, meaning they may have one bank account but rely on alternative financing such as payday lenders, according to the Federal Deposit Insurance Corp. There's a strong link between payday lenders and prepaid debit cards: Pew found that 40 percent of prepaid debit card holders have used an alternative financing product such as a payday loan.
The prepaid debit cards with the best disclosures tended to be those from well-known brands, such as American Express, the study found. The three cards that fully met the disclosure guidelines set by the Consumer Financial Protection Bureau are the American Express Bluebird, American Express Serve and Green Dot Visa Gold.
"Some of the household names in prepaid cards are the safest bets," Schulz added.