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Fed: Prepaid Cards Target Low Income with Excessive Fees

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Critics say they’re misleading; Issuers argue they are safer, than check-cashing stores

By Chris Levister –

Last Christmas Dayvon Morris discovered a gift under his tree he would just assume return. The Rialto college student received a Russell Simmons’ “RushCard” (prepaid Visa card) from his mother who thought it would provide him with an avenue to make electronic payments without having a checking account.

“The card does provide convenience in a world that requires a piece of plastic to make transactions,” said Morris But there’s a downside: Turns out the “RushCard” is being investigated by Florida officials for being predatory and misleading, along with four other prepaid debit cards. Unirush Financial Services, maker of the RushCard pre-paid debit card, has been subpoenaed along with First Data Corporation, Green Dot Corporation, Account Now, Inc. , and Netspend Corporation for making fraudulent claims and charging hidden fees.

Simmons has been an outspoken advocate for promoting pre-paid debit card usage over other banking methods. He claims that he wants to help the black community by providing options that save time and money. Yet, critics say the argument that the RushCard is cheaper than traditional banking is a stretch.

Consumer groups and some lawmakers contend that prepaid cards target low income people with excessive fees that can rapidly erode a card holder's balance and lack some of the protections offered by traditional bank and credit union accounts.

Sen. Richard Durbin, D-Ill., has called on the new Consumer Financial Protection Agency to regulate the products.

“There are a lot of unsuspecting people who are buying these cards,” he says.

The concerns have led to calls for greater regulation of prepaid cards. In a speech late last year, Federal Reserve Governor Elizabeth Duke said financial regulators need to more closely monitor prepaid cards to see if consumers are adequately protected. Sen. Robert Menendez, D-N.J., introduced legislation last year that would limit the fees prepaid cards charge.

Not quite debit cards and not quite credit cards, prepaid credit cards were originally designed for consumers who couldn’t qualify for credit cards or didn’t have bank accounts. They do not provide lines of credit, and information about their use is not reported to the major credit bureaus.

You upload money to the card and then use it for purchases like you would with a credit card – except there’s no line of credit attached to it. Still, they are widely referred to as prepaid credit cards and, in a lot of cases, are mixed in with credit card offers.

For many people without bank accounts, the cards have become essential. Prepaid cards enable people to buy online or via electronic kiosks - an alternative to costly check-cashing storefronts.

There's no need to visit bank branches or reveal many personal details. The cards also help budget: Users can't spend more than they've loaded on a card.

Reloadable prepaid debit cards represent one of the fastest-growing segments of the financial services industry. The total amount of branded prepaid cards is expected to exceed $440 billion by 2017, quadruple the estimated value in 2009. According to independent research commissioned by Master Card, nearly one-third of consumers own some kind of prepaid card.

Even the federal government has embraced the product. Last March, Treasury announced that it would provide 600,000 low-income taxpayers with a prepaid debit card they can use to get direct deposit of their tax refunds.

Now, many are being marketed to teens: a demographic with disposable income but too young to qualify for a real credit card. In the U.S., there are cards emblazoned with such teen pop-culture icons as Edward Cullen, from Twilight, and the most recent prepaid card, the Kardashian Kard (which was quickly pulled off the market.)

For example, a prepaid card endorsed by the Kardashian sisters last year disappeared faster than some of the reality stars' boyfriends after consumer advocates and then-Connecticut attorney general Richard Blumenthal blasted the card's fees. The Kardashian card cost $99.95 for a 12-month plan, plus additional fees for ATM withdrawals, balance inquiries and calls to a customerservice representative. (The card's creator, Revenue Resource Group, recently filed a $75 million lawsuit against the Kardashians for withdrawing their endorsement.) Sen. Menendez adds, “although it’s argued that giving your teen a prepaid card helps them understand the value of money and money management, if at the end of the day all they are doing is running to you to fill it back up every time the card runs out of money, what lesson are they really learning?”

In 2009 the Federal Deposit Insurance Corporation (FDIC) conducted a study entitled “National Household Survey”.

They found that in California 15.8% of African-Americans did not have any accounts at a credit union or bank and 30.9% had an account but still used services from pawn shops, check cashing establishments, etc. to manage funds.

JoNita Oliver of San Bernardino says her prepaid card has helped her father who suffers from early dementia remain financially independent.

“He always took great pride in managing the family budget,” said Oliver “We reload the card with money every couple of weeks. We can monitor his balance and spending online. It gives him a degree of freedom and gives us peace of mind that there won’t be overdrafts.”

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