Electronic purchasing of goods and commodities are a commonplace fact in modern society, and Canada is no exception. Credit cards today purchase everything from travel expenses to groceries to paying the bills. In some cases, vendors now require credit cards just to pay for a transaction, even if the actual payment is going to be in cash at the time of transaction. The credit card is required to reserve the purchase. So for someone to function without a credit card in today’s society is extremely hard.
Access to a Credit Card
The above said, if a person has had a bit of a rough time with finances getting a standard credit card can be a challenge. Most lenders will be averse to putting out a line of credit to someone whose credit report isn’t very stellar. Further, those who do get approved with a questionable history will usually end up paying higher interest rates due to the related risk. However, prepaid cards provide Canadians an option to still be able to utilize the power of a credit card without getting tangled in the mess of credit reports and related rating problems.
The upfront benefit of a prepaid card is that it works just like any other traditional credit card. It can be used on any of the major credit card networks and swiped in any store that carries the same credit card logo (some stores favor specific networks). Most prepaid cards will work just fine anywhere that a vendor takes Visa or Mastercard type cards. There are even cards with the American Express logo and network access.
It’s important to keep in mind many prepaid cards not purchased through an ordering system similar to a regular credit card will be provided without a user’s name on them. That then means the card will be blank on the front, similar to an electronic gift card. While it will work fine at a storefront vendor, online stores won’t take an anonymous credit card of any type. They are required to have a name and address linked to a specific card account. Users don’t have to worry that anonymous cards are the only ones available. As mentioned earlier, named cards can be had through traditional lenders such as banks and major credit card issuers.
Additionally, while not near as common, a few vendors still use imprint machines for processing credit card purchases. These are the clunky machines that roll over the card onto a carbon paper slip, which is then turned in by the vendor to his bank for charging the credit card. It’s an old process used for decades prior to electronic connections for credit card machines. Such vendors won’t take anonymous cards either since there’s no name to imprint onto a carbon slip.
For those who like to cross the border to the U.S. to make purchases, some prepaid cards are also limited to just use within Canada only. So they can’t be used on with U.S. vendors.
Fortunately, even teens can enjoy the benefit of a prepaid credit card. Unlike traditional credit cards which require users to at least be 18 years of age or older, prepaid cards can be issued to younger users. The main reason has to do with the fact the card won’t work unless funds are first deposited onto the card account, and the spending down will be limited to the same funds amount as well. So there’s no ongoing debt risk for the card issuer or parent.
There is a user-budgeting benefit to utilizing prepaid cards. A user can’t spend over what has been loaded onto the card, so he is still essentially working on a cash basis rather than any debt. This forces the user to budget wisely rather than just shoving off charges to another month’s payment, which is what usually gets people in trouble financially.
Further, unlike a wallet full of cash, if a prepaid card gets lost or stolen, it can be cancelled immediately and the user can have it replaced. Unfortunately, there will be a card replacement fee than can range from $10 to $20. However, this is still far better than losing the entire balance completely or a wallet full of cash. Most people will absorb the fee hit as a cost of the protection provided.
Fees and Costs
Users also need to keep in mind if the prepaid card service charges a fee to load funds onto the given card. Many do. There’s usually an initial fee to purchase the card and install the first deposit. Then a lower fee is charged each time the card is loaded again. When these fees are added onto the cost of the money processed, even though no specific interest is involved, the fees can sometimes exceed what would have been charged in interest on a traditional card. That said, most cards can be loaded electronically via an Internet platform, depending on the bank or lender that issues the prepaid card.
As with any card agreement, a user needs to take some caution and read the fine print before using a prepaid credit card. There are quirks and rules that apply that can result in surprises if a person doesn’t pay attention. Usually, many of the terms involve the necessary fees for loading deposits. Use issues will also be defined in the terms, such as border limitations mentioned above.
Prepaid credit cards are not a solution to everyone’s financial needs. They are best considered as a tool among a number of payment options. Used correctly, they can be very helpful. However, users shouldn’t assume they automatically improve a person’s credit record. Paying down debt and bills on time results in far better credit rating improvement over time.
Also see Harper Government’s Prepaid Card Regulations about new Canadian prepaid card regulations.