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Media > Newsletters > Consumer Advocate > July 2012 > Prepaid Cards: The Hidden Costs

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Prepaid Cards: The Hidden Costs


Prepaid cards offer many of the same benefits of a credit card or debit card, such as convenience and easy use, without the requirement of a checking account or credit card. Despite the benefits of prepaid cards and their increasing popularity, many come with high costs.

Prepaid cards work like debit and credit cards, allowing consumers to shop online, reserve hotels, or pay for gas at an unattended station. Similar to a gift card, consumers can load money onto the prepaid card and then use the card to make purchases at stores or online. 

Prepaid cards can be beneficial for individuals who might overspend when using a debit or credit card, because prepaid cards limit spending to the amount available on the card. Some consumers who do not want to do business with banks also like prepaid cards because they can use the card without establishing a debit or credit card account.

But the convenience of prepaid cards can come at a cost.

Cards may have monthly fees, reload fees, ATM withdrawal fees, purchase transaction fees, and balance inquiry fees. With dozens of prepaid cards on the market, each has its own set of fees.

Additionally, there are no specific federal legal protections for prepaid cards. Credit cards allow you to dispute charges, and you are not responsible for unauthorized transactions exceeding $50. Debit cards offer similar protections, as long as you notify your bank within two days of finding the charge. On the other hand, prepaid cards are not regulated by any specific federal laws. The law that covers debit cards does not extend to prepaid cards, and while some prepaid card companies offer protections for consumers, not all do, and they aren’t required to do so by law.

The convenience and lack of regulation also make prepaid cards a popular form of payment for con artists, who often ask potential victims to provide payment through prepaid cards. For example, a scammer might claim you’ve won $1 million in an international lottery and must pay taxes and processing fees by purchasing a prepaid card and providing the card’s activation code. This activation code makes it easy for scammers to access your money almost anywhere.

In the case of Todd and Jessica Steinhaus, an Ohio couple sentenced to prison for running a Craigslist ticket scam, victims purchased prepaid cards in exchange for the promise of tickets to popular events, such as the World Series, NBA Finals, or concerts. The Steinhauses accepted the payment but never delivered the tickets, and the scam eventually took more than $200,000 from hundreds of victims throughout the United States and Canada. Learn more about the case here.

To protect yourself, follow these tips for using prepaid cards:

  • Watch for scams. Remember that prepaid cards often are a preferred payment method for scam artists.
  • Be aware of all possible fees. Read the fine print and talk to a salesperson to understand any monthly fees, reload fees, ATM withdrawal fees, purchase transaction fees, balance inquiry fees, or other costs. Read all the terms and conditions.
  • Keep the card in a safe place. If you lose the card, you might lose all the money loaded onto the card. 

In the end, choose whichever card suits your lifestyle, but remember that convenience can be costly.