Beware Celebrities Bearing Prepaid Cards

by Beverly Harzog on 14 January 2013 6 comments
Photo: waitscm

Celebrities used to get attention by buying a small island or starting a clothing line. But nowadays, they know that one of the surest ways to get into the spotlight (and make a ton of money) is to align yourself with a prepaid card.

Remember the Kardashian Kard? That card had many horrible fees — almost $100 just to use the card for the first year — and it was destroyed by the media. The public fallout was so bad, even the Kardashian sisters couldn’t stomach the bad publicity, and they took it off the market.

Scores of other celebs — from Russell Simmons to Suze Orman to Lil Wayne — have gotten involved with prepaid cards. So I wasn’t surprised when I heard that Justin Bieber, the latest celeb to become an overnight personal finance expert, was promoting a prepaid card offered by BillMyParents, a company that focuses on the teen market.

I was annoyed, but not surprised. Why annoyed? Because celebrities have an opportunity to do something great with their access to the media. We live in a celebrity-obsessed culture and like it or not, these people have a lot of influence.

People listen to what they say. So I’d love to see a celeb take the high road and promote a product that really does help others. For instance, start a foundation for financial literacy or offer a secured credit card with minimal fees. Really, they can do so much better than a prepaid card. (See also: The 5 Best Prepaid Debit Cards)

Why Prepaid Cards?

The Mercator Advisory Group projects that consumers loaded $82 billion onto prepaid cards in 2012. In 2013, $117 billion is projected to be loaded onto these cards. So from the bank’s standpoint, prepaid cards are a great source of revenue both now and in the future.

Prepaid cards aren’t subject to the regulations that capped the interchange fees on debit cards (and neither are credit cards). So this is why banks now push both prepaid cards and credit cards. That’s where the money is, folks.

And recruiting celebs to endorse prepaid cards is a stroke of genius. These are flawed products, but who will notice that if Justin Bieber endorses it? And once he starts tweeting it to his 32 million Twitter followers, these cards will fly off the shelves.

But what’s in it for the celebrities? Obviously, a big piece of the revenue pie. And with the recent recession, this gives celebs a chance to say they’re doing this to “help” people manage their money.

To be honest, I think these celebs have no idea how bad some of these products are. They see an opportunity that offers PR and profits. I doubt many of them have read the fine print and noticed all the fees.

The Problem With Prepaid Cards

When Suze Orman came out with The Approved Card, I wanted to like it. I will say it’s one of the better prepaid cards out there, but there’s no way to avoid the $3 per month maintenance fee. Most prepaid cards will offer a way to avoid those fees if you load a certain amount via direct deposit each month.

Bieber’s card will have a $3.95 per month maintenance fee. If your card is inactive for 90 days, you’ll get hit with a $3 inactivity charge. I’m sorry, but being charged a fee for not spending my own money is absurd.

Some of the other celeb-related cards have really high fees, such as a $14.95 fee just to activate a card. But they bring a cool factor to the product. If it’s a celeb you admire, you trust their opinion. So suddenly the prepaid card with the monthly fee (a fee you pay to use your own money, by the way) looks like a good product to you.

Why Prepaid Cards Are So Popular

There are a few myths out there about prepaid cards, and I think these beliefs help keep these cards popular. For instance, there’s a subtle message that prepaid cards can help your credit.

When Suze Orman released her prepaid card, The Approved Card, there was an implication that this card might eventually help your credit. The fine print actually says that TransUnion has agreed to look at the data in a year or two. There are no promises that anything will be done with the data.

If you think about it, it doesn’t even make sense for prepaid cards to boost your credit. You’re spending your own money. You’re not buying anything on credit.

Another issue is that the media (and even some major websites) refer to these cards as “prepaid credit cards.” I suspect they make this mistake because the Visa or MasterCard logo is on the card. But that just indicates the payment network that’s being used.

When consumers hear “prepaid debit cards,” it suggests the cards are similar to a checking account. In most cases, your funds on a prepaid card aren’t FDIC-insured like they are in a checking account. This means that if the institution that issues the card fails, you lose your money. This would be a disaster for those who live paycheck to paycheck.

But I think the reason I hear most often from consumers about why they use these cards is that they believe it helps them budget. It isn’t widely advertised, but you can opt out of overdraft protection on your checking account.

When you have overdraft protection on your checking account, you’re allowed to spend more than you have in your account. But then you get hit with a fee, which can range from $10 to $39.

But if you opt out of overdraft protection, you’ll have the same result that you’d have if you used a prepaid card to buy something and you didn’t have the funds to cover it. Your debit card will be denied. So it’s possible to maintain a budget by using your debit card and avoid all the fees associated with prepaid cards.

What If You Can’t Get — or Don’t Want — a Checking Account?

Now, for some of you, it isn’t possible to get a checking account. Perhaps your name is in ChexSystems and you can’t qualify for a bank account.

If you can’t get a checking account, then go ahead and use a prepaid card. But consider it a short-term solution. Stay away from the celebrity-endorsed cards and look for a prepaid card that offers a minimum of fees, such as the Bluebird Prepaid Card from American Express. But be aware that the funds you load onto the Bluebird card are not FDIC-insured.

Now, the issue of not wanting a checking account is different. Maybe you got hit with a checking account fee, and you’ve sworn off banks. Whatever the reason, it’s still possible to find fee-free checking accounts out there.

If you’re having problems finding a free checking account, check out your local bank and credit unions. Another good idea is to take a look at online banks. But if you still prefer prepaid cards, that’s fine. Just make sure you read all the fine print. Then read it again!

The Future of Prepaid

The Consumer Financial Protection Bureau (CFPB) has their eye on the prepaid card industry. I’m glad because I’d like to see more transparency when it comes to fees and more consumer protections. As I already mentioned, most prepaid cards aren’t FDIC-insured, and this is unacceptable.

Now, I think too much regulation would backfire and create even more fees. But clearly, we need to have some ground rules in place so consumers don’t get burned by prepaid cards.

Do you use prepaid cards? If so, how do you minimize the fees?

Tagged: Banking
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Guest

Smarty Pig offers a pre-paid card that has 1% rewards on every purchase. It is a one time fee of $9.95 when you get the card.

Beverly Harzog's picture

I haven't looked at the details of that card, but if there aren't any hidden fees, that's not bad. Not many prepaid cards give rewards, so that's a plus.

Guest's picture
Guest

Quite a few years ago I registered with a temp agency that had only direct deposit, either to a bank account or a card. I don't know if it was similar to the cards discussed here but I remember wondering why someone would go that route instead of a bank account. Now I'm seeing TV ads for prepaid cards and the same question occurred to me, especially since the man in the ad says "my paycheck gets loaded automatically onto my card whenever I get paid so I don't have to stand in line at the check-cashing place." I didn't realize some people couldn't get bank accounts; thanks for that info. I also didn't realize these cards weren't free (what *was* I thinking? :) ) but now that I know that I don't plan to use them for anything. But then I have a checking account.

The thing that concerns me though is, it sounds like the target audience for these cards is lower-income people, and they are exactly the ones who probably won't be able to afford the fees. The commercial I've seen doesn't mention fees; there may be some "fine print" at the end that I'm just not noticing. But I wonder how many people will sign up for these things thinking they don't cost anything. Do you have to qualify for them? Are they easy (or hard) to cancel? And what happens if the fees accumulate and aren't paid? Could that compromise someone's credit rating? This sounds like another creative money-making scheme for the card companies that could be seriously dangerous to a cardholder.

Beverly Harzog's picture

You asked some terrific questions! And you're correct that these cards are typically targeted toward lower-income folks. And since prepaid cards don't involve borrowing money, anyone can qualify. Your credit history isn't checked.

I know there are many people who have no idea how the bad the fees can get. That's one reason I get so annoyed when celebs promote these cards without giving all the facts. As you pointed out, the commercials never mention it and the fine print is tough to get through.

With prepaid cards, you often have to look hard to find all the fees or to find out how to avoid the fees. Would you believe I once had to read fine print that had been scanned sideways onto a prepaid card website? I had to practically lay down on my desk to read that thing!

There are procedures for canceling these cards and they vary by card issuer. If you had fees that were unpaid, that would complicate matters. You bring up a great point about the unpaid fees. If someone doesn't pay their phone bill, the vendor could report it to the credit bureaus. So if you had unpaid fees on your prepaid card, it's possible that could happen and it could impact your credit.

It's sometimes necessary to use these cards, but it should be a temporary solution.

Guest's picture

Great post Beverly. I still don't get why anyone cares about the Kardashians though. As for Suzy Orman offering a prepaid card, at best she should be ashamed of herself.

Beverly Harzog's picture

Hi Roger -- Thank you! I agree with you about Orman. Seriously, she's supposed to be looking out for consumers.