Pre-Paid Credit Cards Cheat Those With Bad Credit

Being poor in America these days, or simply struggling with bad credit, is like having a bullseye on your back. Any number of businesses will try to make a buck off your misfortune, including some of the most respected banks in America. (Okay, "respected banks" may be an oxymoron.)

Take pre-paid credit cards as an example. The main reason that people get such cards is that they don't have good enough credit to borrow money using standards cards -- indeed, they may not even have a bank account -- but need a credit card to do key things, like rent a car or check into a hotel. (Parents also give such cards to their kids.) Thanks to the economic downturn, there's been a surge of Americans with terrible credit and pre-paid cards have become a booming business. According to the Network Branded Prepaid Credit Card Association, $36 billion was loaded onto prepaid credit cards in 2010, or twice that of 2009.

Use of these cards may soar even further, because new federal rules reduce the fees that banks can charge for debit card usage. But big banks managed to get prepaid cards exempted from federal credit card legislation.

That's a problem, since prepaid credit cards are often loaded with hidden fees that bilk consumers. Areport by Consumers Union examined fees for a range of prepaid cards and found a veritable blizzard of fees. These include:

• Initiation or activation fees -- which average $10, but can be as high as $39.95.
• Monthly fees -- which range up to $10.
• Point of sale transaction fees -- which can be $1 for each charge made on the card
• Cash withdrawal fees;
• Balance inquiry fees -- which can be $1 each time you check your balance. 
• Fees for transaction statements, including paper and other;
• Customer service fees -- which can be $3 for calling a customer service rep.
• Bill payment fees.
• Fees to add or “load” funds.
• Fees to get your remaining funds when closing the account -- up to $15
• Overdraft or “shortage” fees.

And good luck figuring out all the details about these fees. As the report states:

Consumers typically can find information on only a few of the fees before
deciding to sign up, purchase and use prepaid cards. Retail displays often contain only
purchase prices and initial load amounts. Consumers who research or purchase cards
online will often have to engage in a careful inspection of the prepaid card websites to
find complete fee information. Access to fee information is often less prominent on
prepaid card websites than the sign up pages or registration forms for card purchase. If a
consumer is able to find the fee information, including fee types and fee amounts, they are usually in small print in the Cardholder Agreement or Terms and Conditions.

Critics have been loudly criticizing new regulations on Wall Street and lending institutions passed by Congress over the past two years. But the truth is that there are many ways in which these rules do not go far enough and leave consumers vulnerable to be being cheated. The abysmally weak regulation of prepaid credit cards is a case and point.

The downsides of prepaid credit cards got a lot of attention in November when Connecticut State Attorney General Richard Blumenthal went after prepaid credit card endorsed by the Kardishian sisters, reality TV stars.  The so-called "Kardashian Kard," said Blumenthal: "is filled with gotcha fees and charges, such as $99.95 annual fees, $7.95 monthly fees (after the first year), ATM withdrawal fees, bill pay fees, loading fees -- and even charges for talking to a live operator at their service center, and a card cancellation fee."

Blumenthal fired off a threatening letter to University National Bank, which issued the card, complaining that the "egregious fees" raised ethical and legal questions. The Kardashian sisters immediately pulled the card off the market. But no laws were changed and such cards live on.

And what's really disturbing here is that it is mostly low-income Americans who use these cards and pay those hidden fees -- effectively transferring some of their meager wealth to powerful financial institutions. None of this has gone unnoticed on Capitol Hill, where Senators Robert Menendez, Jeff Merkley, and Richard Durbin have introduced the "Prepaid Card Consumer Protection Act." As described by Senator Menendez, the bill would require:

• Full disclosure of all fees before the consumer buys the card, including a wallet-sized summary of all fees and a toll-free telephone number for customer service.
• Limits on the types of fees that can be charged, including a ban on overdraft fees, balance inquiry fees, customer service fees, fees for inactivity, account closure fees, and other types of fees.
• Consumer protections for prepaid cards such as (1) Regulation E protection against loss or theft and (2) FDIC insurance to protect consumers’ money if the card company goes bankrupt.  Debit cards already have these consumer protections, but prepaid cards don’t.
• The Consumer Financial Protection Bureau and the FDIC would issue regulations within 9 months of enactment.

Consumers Union Report on Pre-Paid Credit Cards