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Beware of prepaid debit cards' hidden costs

By Jennie Bragg, CNN producer

NEW YORK (CNNMoney.com) -- Prepaid debit cards are similar to regular debit cards in the way payments are made, and these handy little pieces of plastic are reloadable.

Sounds like a great deal -- especially for the budget conscious consumer. But user beware! Prepaid cards come with high fees and much weaker protections than those offered by your traditional credit or debit card.

Watch out for fees

Consumers Union recently reviewed the terms and conditions of 19 different prepaid cards and found that consumers faced multiple sky-high fees no matter which card they chose.

"Unfortunately pretty much every prepaid card has a monthly fee because of the revenue structure of the product," says John Ulzheimer, President of Consumer Education for Credit.com. "There just aren't that many ways for prepaid card issuers to make money other than fees, which is why they're so fee heavy. They're fee dependent."

Twelve of the 19 cards reviewed by Consumer's Union had an activation fee. The fee to activate the First Vinyard card? An astounding $39.95. 16 prepaid cards carried a monthly fee, ranging in price from $2.95 to $9.95. All 19 of the cards charged a fee to withdraw cash from an ATM, and 18 charged in order to check the balance on the card at an ATM.

While it seems like you are getting hit from all side with fees, Ulzheimer suggests, "prepaid cards do serve a purpose. They're generally used by consumers who have gone through a credit disaster, or are under banked and can't get a regular credit card and can't get any other form of plastic. The alternative is carrying around a lot cash, which isn't really any better of an option. They aren't a long term solution though."

Prepaid and protection

While many consumers treat prepaid cards like regular debit cards, if a prepaid card is lost, stolen or used to make a fraudulent transaction, the protection is not the same and you may not be able to recover your money.

"Anyone who finds it can use it," says Ulzheimer of a lost card. "Having said that, some do offer security if the card is lost or stolen."

In the event that your prepaid card goes missing, contact the card issuer within two business days Your liability is limited to up to $50 if you report the stolen card quickly, and up to $500 if you report the lost or stolen after two business days have passed.

There is no guarantee that you will recover funds from a prepaid card in the event of a bank failure, because there is a chance they may not be FDIC insured. Be sure to check this out you purchase a prepaid card.

And be aware, while prepaid cards may look the same as traditional debit and credit cards and even have similar names, these cards will not help you build credit.

"The fact that you have to give the issuer money in advance is a disadvantage," stresses Ulzheimer. "Also, prepaid cards don't help you establish or re-establish credit, which is really a need for those who use these types of products." To top of page

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