Prepaid payment cards: 4 ways they differ from credit cards

December 22, 2010

By Barbara Marquand | Money Rates Columnist

Less than three weeks after making its debut in November, the Kardashian Kard drew more jeers than a reality-TV villain and was yanked off the market.

The prepaid debit card, named after the three famous Kardashian sisters, was roundly criticized for its hefty fees and weak consumer protections as well as its blatant marketing to teens. Under pressure from consumer advocates, the Kardashians ended their contract with the bank that issued the card--19 days after introducing it.

But that doesn't mean the end of prepaid debit cards aimed at youngsters. MyPlash, a prepaid MasterCard for teens, features cards picturing music, sports and movie stars. The cards are free to activate, and the fees are less expensive than those of the defunct Kardashian Kard, but they're still notable--$4.95 a month and $1.50 for ATM withdrawals. (The Kardashian Kard included a $59.95 fee to set up the account, a $7.95 monthly fee and a $2 per item for paying bills.)

Under federal regulations that went into effect in 2010, students under 21 can't get credit cards unless they have adult cosigners or can show they have sufficient income to pay the bills. Prepaid debit cards offer an alternative to teens as well as older adults who have bad credit or want to avoid getting into debt.

But the cards can be expensive, and they don't offer the same advantages as credit cards. Here are four reasons to beware:

1. Fees

Prepaid debit cards come with a host of fees, which vary widely among cards. There may be a fee for setting up the account, maintaining the account each month, withdrawing money and making purchases. Read the fine print outlining the fees, and think about how you'd use the card before you choose one, Consumers Union advises. Add up what the fees would be for two months of typical usage to see if the card is worth the cost.

2. No chance to build good credit

Prepaid debit card issuers do not report account activity to the major credit bureaus, so you can't use them to build a good credit history--a must for getting a decent credit rating to qualify for low interest rates on car loans and mortgages.

3. Poor choice for buying gas, renting cars and reserving hotel rooms

Hotels, gas stations and rental car agencies place a hold on your account that's typically beyond what you'll owe to protect themselves against losses. With a credit card, the hold is placed against your credit limit, but a hold on your debit card limits access to cash.

4. No mandatory consumer protections

Federal law limits your liability to no more than $50 if someone steals and charges purchases on your credit card. But those protections are not mandatory for prepaid debit cards.

Consumer advocates are urging federal regulators to step in and require prepaid debit card issuers to offer more consumer protections. Until new rules are created, though, it's up to consumers to protect themselves.

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