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Unemployed slammed with fee-heavy cards

(MoneyWatch) Jobless Americans collecting unemployment insurance pay millions in fees because states have turned to issuing benefits on pre-paid debit cards, some of which carry a host of nagging charges, according to a new report by the National Consumer Law Center.

Paying benefits on plastic cards that can be automatically "reloaded" saves states a small fortune writing and mailing paper checks. However, some of that cost has simply been passed on to the down-and-out recipient. NCLC has no way of estimating precisely how many millions of dollars these fees cost consumers, but the fact that Pennsylvania estimated that a recent change will save its unemployment benefit recipients $5.2 million per year gives a glimpse of how costly these fees can be. It's worth mentioning that states have cut the debit card fees dramatically since NCLC's first report in 2011, but better isn't good enough, says Jillian McLaughlin, co-author of the report.

"Things have gotten better, but costs are still being shifted onto consumers in some unfair ways," she says. "At minimum, consumers need to have a way to access the benefits on their card without paying a fee."

Consider, for example, what happens to unemployment benefit recipients in Alaska, where debit card fees are among the nation's highest. If you need to go to a teller to get cash, you'll pay a $5 fee. If you need to withdraw money from an ATM more than one time per pay period, you get hit with a $1.50 fee. It costs 40 cents to check the card balance; and 50 cents if a transaction is denied because you don't have enough money. If you call customer service, you'll pay 35 cents just to go through the automated telephone prompts.

Indiana and Iowa have similarly miserable programs, which charge a cacophony of nickel and dime fees, according to the report.

There is some good news: 18 states have improved their debit card programs, cutting many of the junk fees. Only three of the 42 states that offer unemployment benefits on debit cards have programs that are so fee-laden that NCLC considers them bad. Twenty-one state programs are rated neutral.

That said, even states that only charge consumers for out-of-network ATM use may want to reconsider. Out-of-network ATM fees are commonplace with all bank cards. However, in this case, consumers are not able to pick a bank that offers convenient access to ATMs. When it comes to paying unemployment benefits on a card, the state -- not the consumer -- chooses the bank and that can almost force benefit recipients to use out-of-network ATMs, prompting nagging fees in the process.

In Ohio, for example, the state contracts with US Bank to provide benefit recipients with debit cards. The only fee jobless benefit recipients pay on the card is a $1.50 out-of-network ATM fee. However, the Ohio counties that have the highest unemployment rates have the fewest US Bank locations. In some cases, jobless Ohio residents would have to travel 20 miles to access a "free" ATM.

It's worth noting that debit card programs were launched partly to address the high check-cashing fees that some benefit recipients paid when they didn't have their own bank accounts. However, the vast majority of jobless claimants do have bank accounts and could often save money by having their unemployment benefits  deposited directly into their bank accounts, instead of receiving benefits by way of debit cards. Many states make this option difficult.

In Arizona, for example, only 16 percent of benefit recipients have their money deposited directly. The reason is clear: The report notes that benefits are automatically paid via debit card. To change that election, people need to get a form, fill it out and mail it. They're not allowed to change the payment method by phone or email request.

By contrast, Minnesota allows consumers to make their own choice of whether they want benefits via direct deposit or debit card and allows them to change their payment method online or over the phone and 82 percent of that state's unemployment benefit recipients have chosen direct deposit.

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