Use of Prepaid Swipe Cards on the Rise

Expect to see more prepaid cards, but watch out for fees.

Until now, reloadable prepaid cards have been primarily used by people without bank accounts, and by states to deliver benefits. But Mercator Advisory Group predicts that $70.7 billion will be loaded onto these cards in 2011, a 68% increase over 2010.

Banks hope that the fees on prepaid cards will help them recoup revenue lost as a result of limits on fees charged to credit card users and, now, cuts in the fees paid every time someone swipes a debit card (for more on bank fees, see How to Get a Better Deal at Your Bank).

Plus, prepaid cards have started to appeal to more affluent customers. Issuers have a “great opportunity to go up-market,” says Brent Watters, a Mercator analyst. Higher-income consumers are using prepaids to avoid going into debt. Or they’re giving one to a child who is traveling abroad or going away to school.

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The new American Express Prepaid card eliminates many of the fees (purchase, activation, maintenance and some reloading fees) that traditionally characterize these cards. However, you will pay $2 for ATM withdrawals after the first one each month. Reload at no charge via checking account transfers or direct deposit.

Senior Reporter, Kiplinger's Personal Finance