The Pitfalls of Prepaid Cards - SmartMoney

Credit-card issuers are cracking down on cardholders, slashing their credit limits and even closing their accounts. As a result, many skittish consumers are turning to prepaid cards.

On the surface, prepaid cards seem like a "safer" way to spend. Backed by major issuers, such as Visa (V: 52.59*, -1.50, -2.77%), MasterCard (MA: 156.08*, -0.99, -0.63%) and Discover (DFS: 5.90*, -0.72, -10.87%), these cards can be used just like regular credit cards -- with the exception that holders can only spend up to the amount they've deposited into their account.

There's no risk of overcharging (and getting hit with an over-the-limit fee) or potential damage to a credit score since the cards don't represent a line of credit. In fact, parents have long turned to prepaid cards as a tool to teach teenagers how to spend responsibly.

But there are drawbacks to this convenient shopping option. Among them: hefty fees that can add up to hundreds of dollars if you're not careful. Here's what you need to know:

Fees, fees and more fees

Prepaid cards may not come with the sky high late-payment fees or APRs of traditional credit cards, but they do carry a slew of other charges. “[Prepaid card issuers are] pretty creative with coming up with random fees,” says Curtis Arnold, founder of credit-card information site CardRatings.com. Cardholders can get hit with a fee when they activate their card, call customer support, withdraw money from an ATM, refill their card or order a replacement card.

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