Senator proposes new rules for prepaid cards
Prepaid cards are clearly on the upswing. According to a U.S. senator’s website, Mercator Advisory Group reckons that the amount of money loaded onto “open loop” prepaid cards that you can use wherever American Express, MasterCard and Visa are accepted (depending on the card) is going to increase to $233.8 billion in 2012 from $60.4 billion in 2009 — nearly a fourfold increase over three years. That’s a lot of dough.
And you can see why prepaid cards are so popular. Anyone with a little upfront cash can get approved for one, so they’re ideal for youngsters and those with badly damaged credit. And they can be a great way to avoid credit card debt or overdrafts: you can only spend your own money. Once the cash you’ve preloaded runs out, the card stops working.
Prepaid card pitfalls
If only that were the whole story, it would be easy to endorse prepaid cards as a panacea for so many ills. But it isn’t. On Dec. 19, Sen. Robert Menendez (D-N.J.) highlighted a number of issues:
- If your prepaid card is lost or stolen, you may stand to lose the balance that remained on it.
- If your card issuer goes bankrupt, you could similarly lose that balance.
- Many cards come with horrifically high hidden fees.
As Menendez notes on his Senate website:
This season, its [sic] hidden fees that are making for a Blue Christmas. Unsuspecting consumers are finding out the hard way that prepaid cards often give you much less than the dollar amount you load onto them thanks to unnecessary fees. We need to ensure that families who rely on prepaid cards are not surprised by hidden charges.
To counter these issues, Sen. Menendez is proposing the Prepaid Card Consumer Protection Act, which would require:
- Comprehensive disclosure of all fees before the card is purchased
- Limits on the fees that can be levied
- Protections if a card is lost or stolen
- FDIC coverage, so money wouldn’t be lost if an issuer goes bankrupt
With luck, such regulation could prevent repeats of a story told by The New York Times a couple of years ago: When Floridian Damon Saxton tried to access money from his prepaid card using an ATM he accidentally hit the wrong keys while he was entering his PIN. His card issuer charged him $2.95 “for a declined ATM transaction.” So he called the customer service center to complain. His pleas fell on deaf ears, but he was charged a further $1.95 for the privilege of calling.
Secured credit cards have advantages over prepaid
If your credit history is too damaged to qualify for an unsecured credit card, then a secured credit card may be a better option for you than a prepaid card. These provide many of the statutory and other protections that mainstream credit cards offer. IndexCreditCards.com recently published an article “Best and worst secured credit cards for 2012″ which teases out some of the differences between these cards.
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