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Prepaid Cards: Beware of These Traps and Fees

I recently wrote a blog post about teaching teenagers how to manage a credit card. One suggestion was to start your son or daughter off with a prepaid card before graduating to something more sophisticated. Today, however, I want to remind parents that even though kids can't rack up thousands of dollars in debt with one of these cards, users are exposed to some onerous fees if they don't select one carefully.

Consumers Union, the nonprofit publisher for Consumer Reports, just came out with a study comparing 19 prepaid cards and found most of them have multiple fees and other costly "gotchas". Here are five egregious charges you need to watch out for:

1. Activation Fees
Twelve of the 19 prepaid cards come with activation fees. The worst offender: First Vineyard card and its $39.95 tariff. (Clearly, you'll want to skip this one.)

2. Monthly Fee
Sixteen of the 19 carry this fee ranging from $2.95 to $9.95. Most of the cards will waive the monthly charge if a direct deposit -- think allowance -- is set up. But the Green Dot card actually requires you maintain a $1,000 balance or make 30 transactions per month. Looks like Consumers Union found another card worth avoiding.

3. Balance Inquiry Fee
All 19 prepaid cards charge a fee to withdraw cash. So you shouldn't confuse this product with a debit card. But 18 of them are really pushing the envelope and taking an additional 45 cents to $1 if you dare to check your balance at an ATM machine.

4. Customer Service
Perhaps the most surprising fee -- and the most offensive one -- is a charge to speak with a customer service representative. At least two do this and they are BuyRight and Exact card. If they nickel and dime you just for calling, I can't imagine the companies will be all that helpful if you have a problem.

5. Inactivity Fees
Like gift cards, some of the prepaid cards carry inactivity fees. The Exact card dares to yank nearly $10 off your account every month it sits idle in your wallet.

If there's one lesson to learn from Consumers Union it's that all prepaid cards are not created equal. If you don't shop carefully, you could end up throwing your money away.

Still, I believe there's a place for prepaid cards with teenagers when the product is used as a learning tool and purchased smartly. You can click here and compare account fees before handing one over to your teenager.

Would you consider giving your teenager a prepaid card?

Istack14 image courtesy of Flickr, CC 2.0.
Stacey Bradford is the author of The Wall Street Journal Financial Guidebook for New Parents.
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