What Are The Pros And Cons Of Prepaid Credit Cards?

There is seemingly no end to the various credit products available to us. However, easy access to personal loans, credit cards, and the like is not always great. Especially when our spending habits can easily get out of control. Enter the prepaid credit card. A tool used by many consumers to help curb spending and stick to a budget. So, how do prepaid credit cards work and are they the right option for you?

What Is A Prepaid Credit Card?

A prepaid card works similarly to a debit card, except it’s not linked to a bank account. You add funds to the card which you use to make purchases both online or in-store. Depending on the card you choose, it may come with certain benefits like cash back and money management tools. 

How Do Prepaid Credit Cards Work?

If you spend any money on your prepaid credit card, the limit will drop in accordance with how much you’ve spent. The limit that a prepaid card can hold is typically dependent on the policies of the company that issues it, but it can range anywhere from a few hundred dollars, all the way up to $15,000 in some cases.

For example, if you put $2,000 onto your prepaid credit card and you use $500, your available funds to use will drop to $1,500. Once you’ve used up the funds, you’ll need to add funds to the card again to reuse it. 

Where Can You Use A Prepaid Card?

You can generally use a prepaid card online and in-stores. Like a regular credit card, you can pay for things using an electronic terminal at retailers, restaurants, gas stations, or anywhere else prepaid cards are accepted.

Do note, you’ll need to ensure the store accepts Visa (if you have a prepaid Visa) or Mastercard (if you have a prepaid Mastercard).

Types Of Prepaid Credit Cards

Prepaid cards come in many forms. You can get prepaid Visa cards or Mastercard. Moreover, some prepaid cards are reloadable, while others are not. With reloadable prepaid cards, you can add money to the card at any point. On the other hand, a non-reloadable prepaid card becomes obsolete once the funds on the card reach zero. 

The Vanilla Prepaid Visa and the Perfect Gift Visa are two common examples of non-reloadable prepaid cards. 

In recent years, more companies have been offering reloadable prepaid cards with extra features and benefits like tracking tools and cash back on your purchases. 

Best Prepaid Credit Cards In Canada

What Do You Need To Qualify For A Prepaid Card?

Anyone who wants a prepaid credit card needs only choose the best option for their needs and open an account with the company.

Prepaid cards don’t require credit checks or a high income. You simply need to be 18 years of age or older. Parents will often open a prepaid account for their children as a gift, or to introduce them to the idea of using credit, all while keeping their spending under control.

Prepaid Credit Cards vs. Regular Credit Cards

At first glance, prepaid cards might look exactly the same as traditional credit cards. But, the way they function is altogether different.

You’re Spending Your Own Money

When you use a prepaid credit card, you’re spending the money you have. With a regular credit card, you’re borrowing money from your bank or other financial institution.

No Monthly Payment

Prepaid credit cards require no monthly payments. With your regular credit card, you’ll have a balance to pay each month (if you make any purchases on it). If you fail to pay your balance, you’ll be charged interest on the balance. 

However, you can make a minimum payment to avoid penalties. Once you’ve paid your full balance, your credit limit resets. The only limit a prepaid card has is how much money you’ve put onto it.

No Interest

There is no interest charge associated with a prepaid credit card. With a  traditional credit card, you’ll be charged interest on any balance you do not pay off by the due date.

Does Not Affect Credit Scores

Any activity on your regular credit cards may appear on your credit report and affect your credit scores in various ways. Responsible usage (paying your bills on time and in full, not going over your credit limit, etc.) may have a positive effect on your credit. While any irresponsible usage (late payments, etc.) may have a negative effect on your credit. 

Prepaid cards, on the other hand, have no effect on your credit score.

Secured Credit Cards vs. Prepaid Credit Cards

Both secured credit and prepaid cards are often advertised to those with poor credit because they’re easy to access. However, there are some major differences between the cards. 

Both Require Upfront Funds For You To Use The Card, But For Different Reasons

With prepaid cards, the funds you add to the card can be used to make purchases. With secured credit cards, the funds you provide upfront are used as security. Therefore, any purchases made on the card still need to be repaid, like a regular credit card. 

Your security deposit also acts as your credit limit which goes up and down as you make purchases and pay your bill. You’ll also need to keep up with monthly payments, be charged interest, and incur penalty fees if and when you miss payments. None of this applies to prepaid cards.

Secured Credit Cards Required A Security Deposit 

Secured cards are called “secured” because they require a security deposit. However, that deposit will be put in a separate savings account or a certificate of deposit. If you default on your payments, that deposit is forfeited. If you keep up a streak of responsible credit usage. You may be able to switch over to an unsecured credit card. At this point, your security deposit will be refunded. 

Secured Credit Cards Can Help Build A Healthy Credit History

Responsible and irresponsible use of a secured credit card may have an effect on your overall credit. Prepaid cards, no matter how you use them, do not affect your credit.

Both May Have Fees

Some secured cards, like regular credit cards, have annual fees. Prepaid cards do have fees but for different reasons.

Most secured credit cards offer the same services as regular credit cards, such as balance protection in the event of unemployment, disability, etc. This is what the annual fee is for. 

Since a prepaid card is not creating any type of debt, there’s no need to offer these types of perks. And therefore no annual fee is needed. 

The Advantages Of Prepaid Credit Cards

Prepaid credit cards come with many qualities that make them attractive to some consumers. For example:

• You don’t need good credit or any credit history. And no credit check is required.
• No need to apply for a prepaid card, as you would with a typical credit card.
• Track your spending and stick to a budget easily.
• You won’t have to deal with late penalties, interest charges, or monthly bills.

The Disadvantages of Prepaid Credit Cards

While they have many noteworthy qualities, prepaid credit cards, like any type of financial product, do come with their disadvantages, such as:

• Certain locations do not accept prepaid cards.
• Some prepaid cards cannot be used outside the country where they were activated.
• If you spend everything on the card, you won’t be able to use it again until you refill it. No revolving credit might mean no money during an emergency.
• Prepaid cards will not rebuild or affect your credit in any way. Since the card is based on money, rather than credit, the card company will not report any activity to Canada’s credit reporting agencies (Equifax and TransUnion).

What Type of Consumer Should Use A Prepaid Credit Card?

As we mentioned earlier, there are many consumers that could benefit greatly from a prepaid credit card. More so than they would benefit from a regular or secured credit card. 

Poor Or No Credit Consumers

As prepaid credit cards aren’t really considered credit cards, just debit-style cards issued by credit card companies. Consumers with poor credit or no credit at all, are a key group that these cards are advertised towards. So, if you happen to have a low credit score and are having trouble getting approved for a normal credit card, prepaid cards might be the right choice for you.

For Families With Young Children

Parents who want to gift their children money. But also want to teach them healthy spending habits. A prepaid credit card could be a great tool. Parents can load the card with as much money as they like. Then their children can use it to purchase items, learn about budgeting the money to cover multiple purchases, and even add more money to the card. 

For Those Looking To Give A Gift

Prepaid cards can also be a good gift for a family member or loved one. The receiver can spend the money on whatever they want and any extra fees will be taken out of the card’s holdings. Once the card is empty, they can simply have it deactivated, then throw it away, or refill it themselves. They are also common among students, who need to pay for books and other supplies, all while sticking to a set limit.

More Interested In Building Your Credit?

If you’re looking to build or improve your credit, a prepaid credit card is not the best choice. In this case, if you already have favourable credit, a regular credit card will benefit you more. If you have poor credit, using a secured credit card until you can have it converted to an unsecured one will likely be the best option.

Always Do Research And Read The Fine Print

If you’re thinking about buying a prepaid card instead of a typical credit card, just make sure you’re being cautious about it and taking all factors into consideration beforehand. Do some research before making any decisions, this will help you make sure that both the card company and the card itself are legitimate.

Carefully read the fine print in the cardholder clause, this way you’ll be completely informed about any fees and rules that come with the card. If you’re happy with the prepaid card, you can continue to spend wisely until you’re ready for the responsibility of a regular credit card.  

Prepaid Credit Card FAQs