Prepaid Debit Cards Come Under Investigation by Florida AG

We’ve written fairly extensively about prepaid debit cards, which we almost never recommend. They come laden with fees for everything from ATM withdrawals to balance inquiries. Now, state authorities are noticing them too.

Florida’s attorney general Pam Bondi recently delivered subpoenas to five issuers including Green Dot Corporation, which partners with Walmart to offer prepaid debit like the Walmart MoneyCard. Her office alleges that the companies did not “divulge all fees clearly and conspicuously to clients.”

“Failing to disclose fees is essentially stealing money from consumers,” said Bondi in a press release. “We will aggressively investigate these practices and ensure that Floridians are protected from hidden fees and charges.”

Those who make up the target market for prepaid cards tend not to be well versed in personal finance, and have low credit scores that prevent them from qualifying for a regular credit card. They are likely to have greater difficulty in deciphering complicated fees, and may not even make it to the third or fourth page of the disclosures where the fee schedule is buried.

The other issuers under investigation are NetSpend, First Data, Account Now and Unirush Financial Services. The last two face additional scrutiny, for claiming that their products will improve users’ credit scores. Normally, prepaid debit cards do not improve credit scores since they aren’t actually loans. Bondi will investigate whether the companies actually reported positive information on a regular basis to any of the three major credit bureaus. This (probably false) claim is meant to entice those with bad or no credit, without divulging that prepaid debit in all likelihood won’t help to “upgrade” to credit.

The Florida investigation represents a move toward greater scrutiny into financial products tailored to the unbanked. Though prepaid debit receives less attention than subprime loans or one-product issuers like Net First Platinum, the cards are still rife with hidden fees and can be a substantial burden to users.

Bad or no credit? Don’t go prepaid.

Even if you have less-than-stellar credit (or have no credit history at all), prepaid debit cards are almost never a sound financial choice. They extend no credit, so you can’t spend above and beyond what you already have. A checking account works the same way, except that it comes with no fees like the ones charged by prepaid debit issuers. And because checking accounts aren’t lines of credit, you don’t need good credit to qualify. For those with absolutely no other option, checking accounts are a convenient way to store money safely and pay without lugging around wads of cash.

However, you should probably think about raising your credit score. A secured credit card is more accessible than a regular one, and reports good behavior to credit bureaus. The Orchard Bank Secured MasterCard is among the most accessible, though it has a $39 annual fee.  Immigrants may want to consider the Capital One for Newcomers, which earns 1% rewards and, a perk when traveling home, has no foreign transaction fee.

The (unsecured) Orchard Bank MasterCard is just about the easiest regular credit card to qualify for, requiring little beyond a $12,000 annual income. However, it has not-insubstantial fees including a $39 processing fee and a $59 annual fee (lowered to $29 the first year). You may be better off going with the lower-fee secured card, if you have the money to post collateral.