Enter the prepaid credit card, which, at first glance, seems enticing - just what a consumer might need. You can pick up one of these cards at a supermarket or discount warehouse store as easy as easily as buying a bunch of bananas or a pound of honey glazed turkey.
To buy one, you don't need good credit, heck you don't need credit at all - ideal for a younger person like a college student who might be unable to procure a credit card the traditional way through a bank. Many prepaid cards companies market their products as safer than cash with no credit check required.
But consumer beware, many prepaid cards come with more hidden tricks than a magician's jacket. In short, most hit card holders with a long list of fees. You quickly realize that a prepaid card is an expensive way to shop, according to Michael Tucker, professor of Finance at Fairfield University.
"Prepaid credit cards are a lousy deal," Tucker said. "It appeals to young people and those with bad credit. But, in the long run, the card companies will hit you with a long list of fees."
The prepaid credit cards work this way: Purchase the card for the limit you want, then you're free to swipe it for any purchase. They typically come in credit amounts of $25, $100, and as much as $500. You can also use the prepaid card at an ATM to get cash. The cards work similarly to bank issued debit cards. What could be more convenient?
But if you're dealing yourself into this card game, read the fine print first. Some prepaid cards require an activation fee of around $9.95. But the fun has only just begun. Then there often are $1.75 charge for each ATM withdrawal, a charge (around $1) for each ATM balance inquiry, a fee for each purchase (50 cents), a monthly maintenance and a charge for inactivity after 60 days and even a $1 charge for a customer service call.
And some prepaid card issuers feel free to charge an application fee up to $99 and whack you with a $25 charge if you overdraw the card balance. Some fees are so outrageous, they have prompted John Gerlach, associate professor of Finance at Sacred Heart University, to call their tactics approaching fraud.
"Prepaid cards are terrible things," he said. "They are an invitation to spend money and charge you for doing so. It borders on fraud. It also invites the government to put more regulations on us, and deservedly so. When companies take advantage of people, the government has to step in."
Despite the hidden fees, consumers are still flocking to buy prepaid credit cards. The card issuers are banking on strong continued growth. Last year, consumers spent $8.7 billion on prepaid cards, according to the Mercator Advisory Group cited in a New York Times article. The trend is expected to jump to $119 billion by 2012, the article said.
The prepaid cards appeal not only to students and younger people with little or no credit history but also to a large number who mistrust typing in a bank issued credit card numbers for Internet purchases, fearing criminals prowling the virtual world. There are also a significant amount of consumers who have felt the sting of rising high interest rates and fees at the hands of traditional banks, and opt for prepaid cards.
Tucker compares the prepaid cards to the rent-to-own centers that end up costing consumers a great deal more to purchase furniture or TV's in the long run. To avoid the prepaid card option, Tucker recommends having parents, siblings, friends or relatives co-sign for a traditional credit card.
"In many cases, these cards are hurting the people who can least afford it," Tucker said. "People without a lot of savvy will purchase these things. It's better to see if you can get a co-signer for a traditional credit card. They're not cheap, but at least they're some regulations."
But if you must have a prepaid card, then financial experts agree that you should read the fine print and know what you're getting into to avoid surprises - not all are created equal.
"There's such a variety and they all have different fees," Gerlach said. "Read all the fine print to know what's best for you. But I would avoid these things like the plague."