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Dinged by prepaid debit card fees; Prepaid debit cards are quickly becoming more popular, but watch out for the wide range of fees that can steadily drain your funds.

You've seen them hawked by reality stars the Kardashians, by hip-hop mogul Russell Simmons, even by money guru Suze Orman.

They're prepaid debit cards, reloadable payment cards that look just like any other debit card emblazoned with the MasterCard, Visa or Discover logo.

And they're the fastest-growing method of noncash payment, according to the Federal Reserve.

People used prepaid cards for $65 billion in transactions in 2010, up from $48 billion in 2009, according to the Nilson Report.

The IRS issued tax refunds via prepaid cards to approximately 600,000 households last year. And since 2008, people without bank accounts have received their Social Security payments on prepaid debit cards.

Many people without bank accounts or who have poor credit have turned to prepaid debit cards for direct-deposited paychecks or to make electronic payments -- the way they would with a traditional credit or debit card.

Some parents give the cards to their children as they go off to college or summer camp. People who typically use cash might make the temporary switch to prepaid cards while traveling. Others use them as a tool to help them budget their money.

Because they are so profitable, more and more companies are getting into the prepaid game.

"There are a couple reasons some new issuers are entering this market. Recent reforms and regulations have hurt their revenue streams," said Bill Hardekopf, CEO of LowCards.com. "The cap on debit card interchange fees is a significant blow to banks. That basically got cut in half."

Those rules do not affect prepaid cards, so banks can still collect uncapped merchant fees when consumers use them, Hardekopf said.

That increased competition is bringing fees on prepaid cards down, but there are still plenty of reasons to rethink using them, according to a new analysis by Consumer Reports magazine.

Prepaid-card users are not afforded the same regulatory and legal protections as traditional debit card users if a card is lost, stolen or used to make fraudulent purchases. That's more money down the drain.

Users also may not have the same FDIC guarantee as a customer with a card linked to a bank account. So if a banking institution goes under, the user may not be able to recover his or her funds.

Financial experts have long recommended prepaid debit cards as an alternative to traditional credit cards as consumers attempt to build or rebuild their credit history. But Consumer Reports found that information from prepaid transactions actually doesn't positively affect consumer credit reports.

Prepaid debit cards also have been touted as a means of accessing lines of credit. But the lines of credit usually associated with these cards are usually so small, must be paid back so quickly and are so expensive, they're more akin to a payday loan than a line of credit that would be acquired from a bank, the report found.

Worst of all, even savvy users may find themselves nickeled and dimed to death. Fees associated with prepaid debit cards are many and hidden.

"While convenient, many prepaid cards are confusing and have many fees, making it difficult for the average consumer to understand exactly how much the card will really cost," Hardekopf said.

Consumer Reports found the following fees associated with 16 prepaid debit cards it studied:

Activation fees. More than half of the debit cards charged fees of anywhere from $3 to $14.95 just to activate the card and start using it.

Monthly fees. The majority of cards had some kind of monthly fee charged, ranging in price from $2.95 to $9.95 per month.

Some cards offered to waive the monthly fee if a minimum deposit is made each month. Others let the user choose what charges he or she wanted to pay -- either a monthly fee or a per-transaction fee.

Cash withdraw fees. Almost all of the prepaid cards charged an additional ATM fee, from $2 to $2.50. That's on top of the fee charged by the ATM operator.

Balance inquiry fees. The majority of cards charge an additional fee to check the card's balance via an ATM, usually from 45 cents to $1 per inquiry. ATM operators may charge an additional fee.

Paper statement fees. In many cases, users who want access to a paper statement detailing their monthly transactions will have to pay for it. Fees range from $1 to $5.95.

Customer service fees. Some prepaid cards charge users for every call they make to customer service, ranging from 50 cents to $2.99 per call.

Other cards will allow free access to customer service to users who have their checks directly deposited or who do not exceed a certain number of customer service calls.

Dormancy fees. Has it been a while since you've used your card? Be prepared to pay. Roughly a third of the prepaid debit cards in the study charged fees when the card is not used after a certain period of time.

The fees range from $2.50 per month after three to 13 months of inactivity to $5.95 per month after 90 days of inactivity.

email: schristmann@buffnews.com