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The Worst Cash Rip-Off Since Bank Fees? Behold an Infuriating New Scheme to Sap Your Money

If prepaid debit cards sound too good to be true, it's because they're a scam. Here's the hidden truth behind them.

Lately I’ve been writing about the little indulgences we all pay to the financial services industry, just for the privilege of using the money we earn or making sure we can survive in a 21st-century world. If we want a bank account that complies with laws against hidden charges, we have to  pay a fee. If we need to borrow a little money to make ends meet, we can get  trapped in a cycle of debt. Even if we’ve done nothing wrong, predatory financial operators can come after us for  debts we don’t owe.

Now, just when consumers think they’ve found a way out, a way to beat the system, the industry remains a step ahead.

Prepaid debit cards, which can be repeatedly reloaded with money and used to make purchases anywhere, have grown in popularity. Roughly 12 million customers loaded around $65 billion onto these cards in 2012, over twice the amount in 2009. This gives people an easy way to make purchases online and do all the things for which modern society demands a debit card.

The reloadable nature of the prepaid card, with the money securely stored and available to be used in any capacity, means it can function as a substitute checking account. Some cards even allow direct deposit and online bill pay. In fact, research from the  Pew Charitable Trusts finds that, contrary to assumptions, most prepaid card users have used traditional financial services before. “Seven out of eight either have or used to have a checking account,” said Alex Horowitz, a research officer at Pew. The cards have become an alternative, rather than a first step into the financial mainstream.

What’s the biggest reason in the Pew survey for why consumers, most of whom previously had a bank account, now use prepaid cards? “A desire to control spending, control fees and avoid debt,” Horowitz told Salon. The beauty of prepaid cards lies in their simplicity; you can only spend what you have on the card. Consumers who use prepaid cards know they can be tempted by easy credit and swallowed by debt, and they want to basically place shackles on themselves to restrict overspending. The prepaid card functions like a credit card, then, without the trappings of one.

Prepaid card companies don’t give away their services for free, of course. just  analyzed 30 different cards, and found a varying suite of fees attached, including monthly maintenance fees, card activation fees, and fees on ATM withdrawals and balance inquiries. Some fee burdens are smaller than others, with competition from banks, new to the market, helping drive fees down slightly. Because commercial banks find the cards easier to maintain and service, they have priced them a bit below fees attached to their traditional bank accounts.

But prepaid cards do not currently have to follow any federal disclosure regulations, giving companies ample opportunity to hide the real charges. And that’s precisely what has begun, just as the industry matures into a major financial services provider.

NetSpend, one of the largest non-bank prepaid card companies, has become the first provider to add to its  cardholder agreement an optional “overdraft protection” feature. This so-called protection allows customers to overspend the amounts on their prepaid cards three times a month, incurring a $15 fee each time. That’s a bit cheaper than overdraft fees on bank accounts, but they still can get expensive with repeated activity. The fees automatically get extracted the next time the customer loads money onto the card.

While customers must opt into the NetSpend feature, the profile of a prepaid cardholder is someone who specifically doesn’t want to be tempted with spending more than they have. “If credit’s available, they may use it,” said Alex Horowitz of Pew. This defeats the entire purpose of prepaid cards, and actually turns them into credit cards.

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