The pitfalls of prepaid credit cards

Prepaid credit cards aren't credit cards - even though they can bear insignia that looks like a credit card - because they require no application or credit check and cannot be used unless there is already money on the card.

While many prepaid credit cards bear the insignia of well-known credit card brands such as VISA or MASTERCARD, these aren't credit cards at all.

In fact, contrary to the name, you cannot purchase anything unless there is already money on the card.  The card requires no application or credit check and sometimes, you cannot withdraw money from any bank machines with it either.

Not every retailer will accept the card. These cards will often carry a phrase such "Valid only in Canada" and many cannot be used with those card machines retailers have to process debit or real credit cards.

Some parents have started giving out these cards to their children as a way of introducing them to credit use while also limiting their spending.  Each card has an amount that's been purchased by someone.

The cards are also useful for online purchases or buying over the phone. They are popular as gifts during the holiday season as well.

Unfortunately, anyone hoping to polish their credit history will be shortchanged.  The Financial Consumer Agency of Canada (FCAC) says non-credit products and prepaid cards do not boost credit scores.

There are also other pitfalls to these cards:

  • They have charges per transaction, averaging about 39-cents each.
  • They have a monthy service fee after an initial six-month grace period.
  • They contain other fees (which include service support, activation fee etc...) which can easily make the card too costly to continue with.

Many consumers are also unaware these cards have had an expiry date — any amount on the card is automatically lost if not used up.  Fortunately, new rules being implemented by the federal government will do away with the expiry date.

What to consider:

  • Is there an activation fee that is more than five per cent of the card's value?
  • What are the terms and conditions of the card?
  • What are the fees associated with the cards:  purchase charge, monthly maintenance fee, etc.
  • Can the money left on a card, once it has expired, be transferred to a new card?
  • What happens if the card is lost?  And is there a replacement fee?
  • Where can the card be used?