Prepaid Debit Cards

What you need to know about getting a prepaid debit card instead of a paycheck


What is a prepaid debit card?

Prepaid debit cards are used more and more by retail employers, including major brands such as Victoria’s Secret, Tommy Hilfiger, Express, and Bath & Body Works. Traditionally, most retail workers receive their pay on a weekly basis by cash, printed check, or direct deposit (which requires a bank account). Many workers find direct deposit convenient if they have a bank account because it is free. Workers being paid through a prepaid debit card receive a card that looks like any other credit card or ATM card. It may say MasterCard or VISA.

Prepaid cards may look just like a bank ATM card, but there a few key differences you should know about. First, unlike a bank account, you won’t receive a monthly account statement and there may be a fee for just checking the account balance. Unlike a bank, you may be unable to withdraw the entire balance of the card at a teller, and you may be charged for withdrawing money at an ATM. Unlike a bank, you may NOT be insured if someone steals your card and makes an unauthorized purchase.

Fees — How Much Will it Cost Me?

Fees associated with prepaid debit cards can take a significant bit out of your paycheck. Most of the payroll cards we’ve looked into allow you to make at least one free ATM withdrawal per pay period. But this is only at the ATM machines in that card-issuer’s network. What if those ATMs are few and far between? Making this 1 “free” withdrawal can cost you time and maybe a train fare.

Then, after the one “free” withdrawal, there are a complex set of fees that the card may deduct from your balance. These include: fees for checking your balance, fees for making a purchase if you use the PIN number instead of signature, and a base monthly fee.[1] If you are charged $3.50 per month each year for your base monthly fee, you will lose $42 just for the privilege of getting your weekly pay.[2] Business Week magazine estimated that prepaid debit cards earned $1 billion in fees alone for issuers in 2010.[3]

Are all these fees illegal?

As an employee you have the choice to be paid by a check, direct deposit into a traditional bank account, or prepaid card. Employers need to get your signed consent form to be paid through a prepaid debit card. If you never signed this consent form, then these fees are illegal. However, if you did sign a written agreement to be paid by card, then these fees are legal. The problem many RAP members have found is that they are asked to sign so many papers upon hire that they are not sure what they have signed. Further, you might sign the consent form before realizing that a prepaid card will take a monthly service fee or other fees from your card. RAP members who have asked their HR Departments for a listing of fees have sometimes been directed toward a website where the font is very small. After you get to page 6 of a document written in 6 point font, your eyes can get tired and it might escape your attention that there is a hidden fee for withdrawing money from a teller. Here is some text from a card used by a national retailer:

“FEES: You agree to pay all fees set forth in the Fee Schedule provided to you with the Supplement (the “Fees”) and you authorize us to collect the Fees by deducting the Fees from the balance on your XXXXXXX Prepaid Services Card. The Fee Schedule is incorporated into and made part of this agreement. We may from time to time amend the Fee Schedule to as set forth in the section of this Agreement entitled “Changes to this Agreement.”[4]

These “tiny print” agreements aren’t illegal but make it very hard to figure out how much the card will cost in fees. Groups such as the Consumers Union have proposed that prepaid card issuers are required to print all the fees in one box instead of spreading them over pages of small type.

What Are My Options?

Irrespective of the size of your paychecks, your paycheck is yours, and you earned it. So are some solutions to avoid fees that can amount to $30 or $40 per month (or more). Your best option is to open a bank account to direct deposit or cash your paychecks. RAP’s Services & Benefits department can be a resource to help you find no-fee checking accounts. If you are blocked from opening a traditional bank account, you may have to choose between the lesser of two expensive evils: a check-casher or a prepaid debit card. RAP can also help you find low-fee prepaid debit cards to have your check sent to. These are also transferrable from employer to employer.

Workers unable to open a traditional bank account might also do their checking through a Community Development Credit Union (CDCU)[5]. These not-for-profit alternatives to commercial banks provide low cost checking accounts and reinvest in low-income communities. They may also provide small low interest loans.


[1] Other fees that have been documented include: Initiation fees, fees to “load” funds, fees to get your remaining funds, and fees for bill pay. Most companies also charge about $10 if you lose your card and need a replacement.

[2] The other charges can range from 50 cents for making a purchase to $2 for checking the account balance. A report by the Consumer’s Union examined the fees for common cards such as the RUSH card and the WalMart Money Card. They found a typical user could be charged between $17 and $44 per month for making just a few bill payments and balance inquiries. Prepaid Cards: Second-Tier Bank Account Substitutes, September 2010.

[3] Estimate was based on $65 billion in total transactions in 2011. “Bank’s New Money Machine: Prepaid Cards,” May 26, 2011.

[4] If you had trouble reading that, here is the same text in human-sized print….. Here is some text from a card used by a national retailer: “FEES: You agree to pay all fees set forth in the Fee Schedule provided to you with the Supplement (the “Fees”) and you authorize us to collect the Fees by deducting the Fees from the balance on your XXXXXXX Prepaid Services Card. The Fee Schedule is incorporated into and made part of this agreement. We may from time to time amend the Fee Schedule to as set forth in the section of this Agreement entitled “Changes to this Agreement.”

[5] For a list of Credit Unions in New York City, visit http://nedap.org/resources/documents/NYCCDCUs-09.10.pdf