Soon after WalMart announced it will pay employees without direct-deposit banking via debit cards, Consumers Union, the organization that publishes Consumers Reports, came out with this in-depth review of "prepaid cards" and why they suck...I mean, why they're "second-tier banking account substitutes." I

n a nutshell, here's why:

• The fees you're charged to use them are multiple, high and confusing.
• They don't provide great protection when someone steals your card or uses the card account numbers.
• Their promises to give you a credit line or build a credit record can be expensive and overblown.
• Unlike bank accounts, prepaid cards aren't FDIC-guaranteed, meaning you may not recover all your money if the issuing bank goes under.

The report lists the 12 most common fees associated with using a prepaid card, ranging from activation and monthly fees to fees when adding funds to the card or closing your account.

In the Wall Street Journal story about WalMart's new prepaid-card payment process, First Data Corp., which will process the transactions, said it would "offer some of the lowest fees available among such cards....Employees' first ATM transaction for a pay period is free; subsequent ones cost $2 each."

So a WalMart employee gets zapped with fee after fee for using a prepaid card ... that has his hard-earned paycheck on it!


To see how much those fees add up every month, the study authors tested three prepaid cards: The WalMart Money Card, two types of the Rush Card from hip-hop mogul Russell Simmons, and the AccountNow card. Over two months, their sample prepaid cardholder made three ATM withdrawals, three bill payments, eight purchases at the grocery store and restaurants, a weekly balance inquiry and two deposits.

The WalMart card averaged a monthly cost of $19 in fees. The Rush "pay monthly" Card (with a $3 activation fee and $9.95 monthly fee) averaged $20, while the Rush "pay as you go" Card (no monthly fee but a whopping $19.95 activation fee) averaged $35. The AccountNow card averaged $28.50 in fees. That's a big bite out of any account balance.

Prepaid cards are not just for low-income workers who are leery of or don't qualify for standard banking accounts -- the average American may be getting them too, whether she wants to or not. As Salon.com editor Andrew Leonard noted in his "How the World Works" blog, he got a Citi prepaid card as a rebate for purchasing a new Verizon Wireless phone, instead of the traditional check.

"It's obvious why," he writes. "Verizon and/or Citi are banking on the fact that I will forget to use the card, or will have trouble using every last penny of it, or will be so laggard in spending it that they will be allowed to start charging me a 'maintenance fee.'"

At least he can exchange it for cash or use it pay his bill online. He got me worried by citing AT&T, my cellular provider, which issued prepaid cards last year that couldn't be exchanged for cash and expired in just 120 days. AT&T had to pay $2.6 million to New York state to settle allegations of deceptive advertising.

So if you get a prepaid card from a merchant or an employer, it's probably best to immediately withdraw the funds off the card all at once -- and move them to a traditional bank account. Even though banks can be annoying with their various card fees, they seem pretty tame compared to prepaid card issuers.