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Overdraft Fees Sneak Up With Prepaid Cards, Consumer Advocates Say

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Some prepaid cards charge overdraft fees, but there is no disclosure requirement.
Some prepaid cards charge overdraft fees, but there is no disclosure requirement.

NEW YORK -- Prepaid cards have been touted as way to not overspend. Yet some prepaid cards are designed to let you do exactly that -- spend more money than you actually have.

A number of prepaid cards offer overdraft services, charging from $10 to $15 per overdraft. That has some consumer advocates worried that prepaid cards are morphing into credit services that may be costly to consumers.

Overdraft protection "is antithetical to the product," said Susan Weinstock, director of Pew's Safe Checking in the Electronic Age project at Pew Charitable Trusts. "It is now credit product and we want to make sure the card does what [consumers] think it's going to do."

On Wednesday, Pew Charitable Trusts released a study that found the majority of the 52 cards it surveyed did not allow overdraft programs. But 35 percent of the cards either disclosed overdraft fees or failed to disclose any information about overdraft policies.

Some of the biggest banking names offering prepaid cards, including Chase and American Express, don't let cardholders overdraw their available balance. These cards, which charge a monthly fee, stop working when there is no more cash available.

But other prepaid cards offered by alternative financial service companaies do, including market-share leader NetSpend, have overdraft services that act as small lines of credit. For consumers trying to select a card, the only way to find out is to read the fine print.

NetSpend's overdraft program does not charge a fee if customers reload the card with more money within 24 hours of the overdraft, or if the amount of the overdraft is less than $10. However, the company charges a $15 fee for each overdraft up to $100, the maximum amount allowed. Overdrafts are capped at three per month. The card allows customers to set up account balance text message alerts. Another card, called Modern Cash, charges a $9.95 fee if the account is $1 or more in a negative balance, up to $100.

In the Wall Street Journal, NetSpend CEO Dan Henry likened the program to providing a bridge loan for customers "until their next paycheck."

Bank overdraft fees on a checking account range from $20 to $37 per item. The Pew study showed that for consumers who routinely make at least two overdrafts per month with a bank account, a prepaid card may be cheaper than a traditional checking account.

However, there is a key difference between checking accounts and prepaid cards. Banks must give checking account customers the choice to accept overdraft protection. Prepaid cards have no such regulations, which means customers may be at risk of running up fees without knowing about it, the Pew report said.

The Consumer Financial Protection Bureau is currently considering guidelines for the prepaid industry, including rules about overdraft protection services.

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