Report: States Let Banks Charge Unemployed Workers "Junk" Fees

Paying unemployment benefits with prepaid debit cards instead of paper checks may seem like an obvious win-win. States get to save money on printing checks. And people who are out of work get to avoid spending precious money on check-cashing fees.

But in many states, prepaid cards are actually a win-lose, according to a new report by the National Consumer Law Center. States do save money. But in many cases, unemployed workers are hit with exorbitant hidden fees that could cost them considerably.

“These junk fees stack the deck against unemployed Americans,” Lauren Saunders, author of the report, said in a conference call with reporters. “Unemployed workers need every dollar and they don’t need bank tricks.”

The fees associated with prepaid unemployment debit cards vary state by state. Users in Arkansas pay $20 every time they overdraft their card. In Florida, unemployed people pay $2.25 every time they withdraw cash from an out-of-network ATM, plus up to $3 every time they talk to a human teller. Twenty-four states charge fees every time a user tries to make a purchase that is denied for insufficient funds.

[Consumer Resource: Emergency Fund: How to Plan for a Financial Emergency]

Of all the states, Tennessee’s program is the worst for workers, Saunders found, because it charges every type of fee available. The state’s card charges up to $1.00 per ATM withdrawal, with no free withdrawals up-front. The card charges users a fee for checking their balance and another fee for denied transactions in which the user doesn’t have enough money to cover a purchase—a Catch-22, the report finds. The Tennessee card also charges users a quarter every time they make a debit purchase.

All money from the fees goes to Chase Bank, which operates the card program for the state.

“We think overdraft fees are totally inexcusable in general, and especially when they’re charged against unemployed workers,” Saunders says.

The organization called on states to renegotiate their agreements with the banks to get rid of “junk fees,” Saunders says. States also should make it free and easy for people find their account information, and should do a better job encouraging people with bank accounts to receive unemployment benefits by direct deposit, according to the report.

The states with the most favorable prepaid unemployment benefit cards are New Jersey and California, Saunders found. Both states charge fees only for ATM withdrawals outside of the bank’s ATM network, and both states allow a number of out-of-network withdrawals for free before they start charging fees.

[Featured tool: Get your free Credit Report Card from Credit.com]

Image: smlp.co.uk, via Flickr