Prepaid cards gouge you to access your own money

Mon Feb 13, 2012 3:36pm EST

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(Reuters) - Why should you pay to spend your own money? The newest generation of prepaid debit cards, which banks keep offering despite the growing chorus of advice to the unbanked against buying into them, often levy more fees than conventional credit cards. The latest indignities even include charges for adding money to your account.

There are myriad reasons people choose a prepaid debit card,

but they are all predicated on the hypothetical equation that the cards will save them money over traditional checking accounts with potential overdraft fees. Yet, with these cards, you don't build a credit history to increase your credit score; you don't avoid fees; and, you don't structure your finances so that you spend more wisely.

The only real beneficiaries of these cards are the institutions that issue them, because the fees add up with the same regularity as with bank accounts, and sometimes amount to more charges for the users than there would be with a traditional checking account.

Take the new Mango card, for example. While it gives you a paltry $20 one-time bonus for enrolling in direct deposit -- far less than what the issuing bank will save over time -- it charges you $2 per ATM withdrawal, $4.95 to deposit cash through a third party (direct deposit is free) and 50 cents for each balance inquiry.

To its credit, the Mango card is linked to your savings account and will reimburse the $5 monthly fee if you add at least $500 a month, which is a virtual wash when you consider the reload fee. And there's a big catch on the promised 6 percent yield on the savings feature: It's only for balances less than $5,000 and it's a teaser rate, so it won't last long. Have more than $5,000 on deposit? Then the rate is 0.10 percent.

Unlike the new fee-laden Approved Card, which has TV personality Suze Orman as a promoter and investor (link.reuters.com/jex56s),

the Mango card is being endorsed -- but not co-branded by -- comedian George Lopez. While Lopez may be a funny guy, the card and its fees are no laughing matter if you're serious about saving money.

Celebrity cards are rarely a good deal. In most cases, you'll pay more, so instead of running toward celebrities' financial products, we should be bolting away from them. Which brings to mind Russell Simmons's pre-paid Rush Card, also marketed under "Baby Phat," which advertises no "hidden fees."

The music mogul has promoted the card as a way to empower the black community with access to banking services. While the card doesn't hide its fees -- they are listed in the cardholder agreement (link.reuters.com/sex56s) -- they certainly add up and don't encourage net savings. The company will impose surcharges up to $14.95 just based on the design or logo on the card. You are allowed two free withdrawals per month, but after that the cost is $2.50 per transaction. There's no charge to add money, but if you need to replace your card or get express cash, it's $30 for each service. The basic plan costs $9.95 a month.

The obvious drawback to consumers of paying multiple fees for access to their money on these products came to the attention of the Florida Attorney General's office, which last year was investigating the claims of the Rushcard and other prepaid card companies. Perhaps more state attorneys general should start looking into bank practices on these prepaid cards to see if there is any predatory marketing going on; and work on regulating the message banks are sending. Maybe a consumer campaign on Twitter would be enough to put a stop to them.

Simmons, for his part, responded to the Florida probe by defending his product, saying: "third party research has shown that for many customers, the best prepaid card services offer significant savings compared to what they would pay in traditional bank checking accounts, with savings of up to 50 percent." (link.reuters.com/kex56s)

If there were no free checking accounts or debit cards available, that might be true. But we recently listed 10 options (link.reuters.com/wep95s), and you can go to a site like bankrate.com (link.reuters.com/mex56s) and find plenty more. Some 76 percent of credit unions (link.reuters.com/nex56s) offer free non-interest bearing checking accounts. You can still get socked with overdraft fees, though, so you have to be careful how you use them. You can also do a detailed calculation comparing bank fees and prepaid debit cards fees at the credit card-comparison site nerdwallet.com (link.reuters.com/pex56s).

Want to stick with banks? Then check out online banks. More than half of them offer free checking accounts with no maintenance fees, according to Moneyrates.com (link.reuters.com/qex56s),

which notes that "free checking is making a comeback."

If you really want to endorse what a celebrity is doing, just watch their shows or buy their books or music. Stay away from their financial services offerings. They are not only banking on their fame, they are overcharging you to subsidize their celebrity.

(Editing by Beth Pinsker Gladstone and Andrea Evans)

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