Beware of Prepaid Cards

Prepaid cards are reloadable and can be used for purchases at businesses that accept credit cards and can sometimes be used for ATM withdrawals. A prepaid card should be used in addition to having a traditional bank account but should not solely for money transactions.

There are many advantages to using prepaid cards but there are also many disadvantages. Prepaid cards work similar to debit cards for making payments or purchasing items.

Prepaid cards are helpful for those who cannot get a credit card or open a bank account due to bad credit. Prepaid cards are also helpful if you don’t want to carry large amounts of cash but should only be used as a temporary measure until your financial situation improves.

Prepaid cards have activation fees, monthly fees and other hidden fees. Some prepaid cards have activation fees up to $39.95 but most fees range from $2.95 - $9.95. They also have less protection against loss or theft. Be sure that the bank prepaid card you use is FDIC insured. Prepaid cards are not reported on your credit report and cannot help rebuild your credit.

Some consumers have been scammed by companies regarding prepaid cards. Over 100,000 consumers who paid for payday loans online were tricked into paying for prepaid cards instead. Consumers signed up for payday loans but were tricked into signing up for prepaid cards with a zero balance. Consumers paid up to $54.95 for the cards. However, the Federal Trade Commission sued the company Epiq Systems and required a refund of $1.9 million dollars for refunds ranging from $10-$15 each.

Many non-financial companies also offer prepaid cards such as Facebook which is available at Target and Wal-Mart. The cards can be used to purchase Facebook credits which are applied to purchase games or other applications. Comparison shop and read all the fine print before choosing a prepaid card.

What You Need to Know About Gift Cards

The CARD Act of 2009 has regulations that affect gifts cards. Starting on August 22, 2010 the CARD Act will require that gift cards have a five year expiration date that must be disclosed to the consumer in advance. These regulations do not apply to prepaid telephone cards and reloadable gift cards.

Gift cards and gift certificates that have not been used can't incur inactivity fees for at least 12 months, and the amount and terms of the fee must be disclosed to the consumer in advance. After a year, only one fee can apply each month. Previously multiple fees were applied each month.

In September 2009, American Express ended its monthly gift card inactivity fee that states that after a year a card that had a balance was charged $2 deduction every month until the balance was zero.

Unfortunately gift cards can still charge upfront fees such as a fee for activity the card which can range from $4.99 - $9.99.

Consumers unfortunately may have to pay higher fees upfront after August 22, 2010 to make up for the revenue companies will lose by not being able to charge inactivity and other fees after the card is purchases.

Help for Gift Card Buyers

This year we will see a lot of changes in the banking industry. We have seen the CARD act that became effective February 22, 2010. A new regulation for debit cards becomes effective July 1, 2010. Now as part of the CARD Act a new regulation by the Federal Reserve will begin on August 22, 2010 that affects gift cards sold on or after August 22, 2010.

The new regulation applies to gift cards, non-reloadable or promotional program prepaid gift cards and gift certificates. The new regulation puts restrictions on inactivity or service fees which caused many consumers to lose the value on gifts cards or gift certificate due to the outrageous inactivity or service fees charged.

Here are some of the major features of the new gift card regulation:

1. Inactivity or service fees will only be allowed for a gift certificate or gift card that has been inactive for at least one year.

2. Only one fee can be charged per month and the consumer is provided clear disclosures about the fees.

3. Additional fees that are restricted by the regulation include ATM fees, service fees, monthly maintenance fees, balance inquiry fees and transaction based fees.

4. Gift certificate, gifts cards or non-reloadable or promotional program prepaid cards can no longer be sold if the expiration date is less than 5 years from the date of issue or the date the funds are last loaded on the card.

5. Fees will no longer be charged for replacing an expired gift card or gift certificate or for refunding the remaining balance if funds are still available.

Although consumers will no longer be charged these fees you better believe that the banking industry will find other ways to earn the revenue they are losing with all the new regulations so make sure you read my blog for additional updates throughout the year.