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Prepaid debit cards about to get more expensive

June 24, 2011

| Money Rates Columnist

A growing number of Americans who use prepaid debit cards in lieu of a checking account could soon be slammed with fees over and above the already hefty levies they carry.

Fee hike on the horizon for prepaid cards?

According to the Associated Press, prepaid debit card companies are expected to hike fees on the cards in July, 2011 when they are forced to lower the swipe fees they currently charge retailers. Those fees--also called interchange fees--are expected to be lowered in July by the Federal Reserve Bank in response to new banking rules passed by Congress.

Although prepaid card users were supposed to be exempt from the fees, AP says those limitations could take a year to enact. In the meantime, fees are expected to go up by as much as $220 a year for some prepaid card users--on top of the various fees already charged to them.

Most prepaid debit card users are lower-income consumers who have decided to forgo a checking account, savings accounts or an online savings account with a traditional bank because of the fees banks charge for those services. Many others use the cards as savings accounts or budgeting devices; once the money on the card runs out, the cardholder can't use it anymore and thus avoids overdraft fees associated with a traditional checking account

Prepaid cards increasingly popular with consumers

According to AP, the cards are becoming increasingly popular; $288 billion is expected to be loaded onto prepaid cards by 2014, up from the $140 billion consumers spent on cards in 2009. Some employers are now paying employees with prepaid cards, and the IRS issued tax refunds to 600,000 people this year with prepaid cards.

American Express became the first big-name financial institution to issue its own prepaid debit card recently. According to USA Today, the new card has fewer fees than other prepaid cards, which typically charge you every time you reload the card or make a withdrawal from an ATM. Prepaid cards, unlike credit cards or debit cards linked to a checking or money market account, lack federal protections when the card is lost or stolen.

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