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The Problems With Unemployment Benefits on Prepaid Cards

Many states now choose to issue unemployment benefits to residents who are out of work through prepaid debit cards, rather than checks as they have done in the past. But new research suggests that issuing benefits this way can actually cause problems for many consumers.

While it might seem convenient for unemployment beneficiaries to receive their funds on prepaid debit cards, particularly if they don’t have a bank account of their own, there are a number of issues they could face by doing so, according to the 2013 Survey of Unemployment Prepaid Cards from the National Consumer Law Center. Problematically, while 36 of the 50 states allow workers to set up their unemployment payments as direct deposit into their existing checking accounts, others first automatically enroll them in prepaid card programs, which they then have the option to change.

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In all, five states (California, Kansas, Indiana, Maryland and Nevada) require the unemployed to receive benefits on prepaid cards through their official vendors, the report said. They are then allowed to automatically transfer the funds to their own bank accounts, but it slows the payment process by between one and four days, and only 24 percent at most actually enroll in those transfer programs. Indiana and Nevada in particular only allow payments to come through prepaid cards, and offer no automatic transfer, checks or direct deposit. However, Nevada is looking into automatic transfers.

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On the other hand, most states have dramatically improved their prepaid card programs in the two years since the NCLC last conducted its survey, the report said. Overdraft fees on these cards no longer exist, and ATM fees and others related to point-of-service are much easier to avoid. Currently, the organization rates 18 states’ cards as being “thumbs up” compared to just three as “thumbs down,” though that’s out of 42 studied. That’s a huge shift from the 2011 study, which studied 40 cards, and just gave eight cards the thumbs up, and 16 the thumbs down.

Prepaid cards are often criticized as carrying too many fees to make them truly worthwhile for consumers, but experts say that these costs may be preferable to those now being charged by banks for services — such as checking — that used to be available free of charge. Many of these banking costs are applied to consumers who have minimal deposits, and most prepaid card users have lower incomes.

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