Loaded propositions

Consumers are increasingly turning away from traditional bank accounts and credit cards in favor of a different form of plastic: prepaid cards.

Consumers typically buy them from a retailer, load them with money -- sometimes from directly deposited paychecks -- and use them at checkout counters or to pay bills online. And the cards are advertised with a phrase rarely used by financial institutions since the beginning of the credit crisis: No credit check necessary.

So it's no wonder that in 2008, consumers loaded $8.7 billion on prepaid cards that carry Visa, MasterCard, American Express and Discover logos and can be used anywhere, up from about $4 billion the year before, according to Mercator Advisory Group, a research firm that focuses on the payments industry.

Consumer advocates warn that the cards can carry an assortment of fees. Nevertheless, prepaid cards have become popular among those who cannot get traditional bank accounts, many of them immigrants who rely heavily on more expensive check-cashing institutions.

Many college students use them as an introduction to plastic, and industry experts say they expect that practice to increase when a credit card law takes effect in February that will make it difficult for anyone under 21 to obtain a credit card without an adult co-signer.

Increasingly, industry representatives said, prepaid cards are also attracting consumers who are simply fed up with high credit card interest rates and bank overdraft fees or are searching for better money-management tools.

"It's a stepping stone to getting traditional bank accounts, but what we've seen is that prepaid cards have developed increased functionality over time as a substitute," said Rachel Schneider, innovation director at the Center for Financial Services Innovation.

Megan Niedermeyer, 24, graduated from college in 2007 with thousands of dollars in credit card debt. To help her with her finances, her parents got her a prepaid card, first loading it with $200. She managed to pay off her credit card debt and used the prepaid card to make purchases for things such as gasoline that she previously managed on credit. She no longer uses her credit card.

"The best thing about prepaid cards is you use money you have, as opposed to credit cards where you keep spending and spending," said the Northwest D.C. resident who works in international finance.

Despite the advantages, consumer advocates urge caution because, they said, prepaid cards can come with as many or more fees as credit cards and bank accounts.

"A lot of people think it keeps your spending down and is good for budgeting, but you're getting charged fees every which way you turn," said Michelle Jun, a staff attorney at Consumers Union.

In an August survey of 18 prepaid cards, Consumers Union found that 17 issuers charged activation fees ranging from $3 for the Wal-Mart Money Card to $99.95 for the Millennium Advantage card.