An increasing number of unemployed Americans are at risk of having to pay fees on their unemployment benefits.

The ranks of the unemployed continue to swell with 216,000 job losses registered in August pushing the unemployment rate to 9.7%, the Department of Labor said on Friday.

And as already cash-strapped states face larger payouts of unemployment benefit payments, they are finding other ways to cut costs. Many states are saving on printing and shipping unemployment checks by replacing them with special prepaid debit cards. So far, 31 states have started using such cards, according to the Labor Department.

The problem is that these cards often charge fees for things like ATM withdrawals, balance inquiries or customer service calls, says Lauren Saunders, managing attorney at the National Consumer Law Center, an advocacy group. And they offer weaker consumer protections than credit cards or debit cards that are linked to bank accounts.

In August, the Labor Department addressed these concerns in a letter to states workforce agencies outlining how the programs should be set up. The letter recommended that states use direct deposit (rather than prepaid cards) for people who have bank accounts and that they ensure that consumers using a prepaid card are aware of the fees they could incur. The Labor Department also recommended that states negotiate with card issuers to set fee schedules that are more favorable to consumers.

The way most prepaid-card programs are set up right now is beneficial to the state and the card issuer but not the consumer, says Michelle Jun, a staff attorney with consumer advocacy group Consumers Union. The states pay no fees to the banks issuing the cards, yet they save millions of dollars by not having to print and mail paper checks. In 2008, the Texas Workforce Commission (TWC) saved $1.5 million in printing, postage and other fees by switching to debit cards, says Lisa Givens, a spokeswoman for TWC.

Meanwhile, banks rake in interchange fees (paid by retailers when consumers use the cards for purchases) along with the fees paid by consumers.

Switching to plastic is a step that we understand the states have to make to cut their costs, but at the same time many of these costs are being shifted back to consumers, Jun says.

Kirsten Trusko, president of the Network Branded Prepaid Card Association, an industry group, says that unlike general-purpose prepaid cards, the cards used for unemployment benefits don t have monthly usage charges or activation fees. And consumers can make at least one free ATM withdrawal per benefit payment (as required by federal rules).

In addition, all states offer unemployment benefits recipients the option to receive payments via direct deposit into their bank accounts, Trusko says.

But there are a few exceptions, says Consumers Union s Jun. Debit cards are currently the only unemployment benefits payment method in at least four states. Maryland and Kansas don t offer direct deposit, though Citigroup (C), which administers both states programs, allows consumers to set up an automatic transfer of the money to their bank accounts. The transfer is free of charge, according to a Citi spokeswoman. Indiana residents must call weekly to arrange for a transfer because the state opted out of an automatic solution to protect consumers bank account information, says Marc Lotter, a spokesman for the Indiana Department of Workforce Development. Texas does not offer direct deposit and issues paper checks only to claimants who demonstrate need or if a card account has been closed because of misuse, according to TWC s Givens.

Whether your state offers no alternative to debit cards or you signed up for one not knowing the risks, you can avoid paying fees if you use your card wisely. Here s how:

Know your consumer protections

When you use a credit or debit card, you have maximum protection from identity thieves and rogue merchants. Thanks to federal law, you can dispute fraudulent purchases; and with credit cards, you can get reimbursed for merchandise that was defective or never received. But that s not necessarily the case with these prepaid debit cards. It s unclear whether the federal law that protects bank cards covers these cards as well, Saunders says.

All cards offer some sort of protection as long as you inform the issuer of the loss in a timely manner. Typically, you will only be liable for $50 if you alert the bank to a lost card within two business days. But if you wait up to 60 days, you can lose as much as $500. And you may not be reimbursed at all if you wait longer. These disputes can be costly as many issuers charge fees to replace a lost card.

Avoid fees

In its recent letter to unemployment insurance programs, the Labor Department recommended that states issue wallet-size cards listing all fees associated with using the debit card. But so far, no state follows that practice, a Labor Department spokesman says. They attach a fee schedule when they mail you the card: If you can t memorize it, print a copy and carry it with you.

All cards allow at least one free ATM withdrawal per benefit payment (as required by federal rules), but chances are after that you'll be charged anywhere from 75 cents to $1.50 per withdrawal. But some cards won t charge a fee if you go to a bank teller or get cash back (see Nevada s. You can also set up automatic transfer to your bank account (though some states cards like the Missouri Access MasterCard or use your one free ATM withdrawal for the whole balance.

Most cards will also charge a fee for declined transactions (because of insufficient funds, for example) or overdrafts, if allowed. Before you make a purchase, make sure you re not low on cash. Checking your balance online is typically free (careful, though, if you check it at an ATM where you may be charged a fee) and so is receiving electronic statements. Paper statements may cost you a few dollars a month, but if that s the only way to monitor your account, it may be money well spent, Saunders says. It s also the easiest way to track your fees, she says. Seeing that you ve spent $10 or $15 a month on withdrawals and balance inquiries may be the kick you need to start tracking those charges more carefully.