Are prepaid credit cards right for you?

Last year Canadians spent nearly $3 billion on prepaid credit cards. Should you do the same?

Are prepaid credit cards right for you?
If you have a kid just starting high school this year, you might be considering giving her a prepaid card for everyday minor emergencies, such as when she forgets her lunch. Is this a good idea? Prepaid cards, available at any bank, are the fastest-growing noncash method of payment in Canada, representing $2.7 billion in spending last year and growing at a rate of 30 percent annually, according to MasterCard. They're very similar to gift cards but can be used at more places.

The benefits of prepaid credit cards
Yes, they're great. The cards offer all the benefits of traditional credit cards (for example, they can be used to make online purchases or arrange hotel reservations) and are available to people who have poor credit histories or don't qualify for conventional credit cards. They also make great gift cards, as they don't limit the recipient to just one retailer. Prepaid cards can help you avoid going into debt, are safer than cash (they're replaceable) and provide peace of mind to parents who want to introduce their teens to using credit while limiting the risk of overspending. (Justin Bieber is the latest celebrity to cash in on the prepaid plastic phenomenon by endorsing the SpendSmart card aimed at teenagers.)

Vancouver money coach Sheila Walkington says prepaid cards have been a godsend to some of her clients who have gone bankrupt."They load their card with, say, $500 and when the money is gone, it's gone." They're also a good budgeting tool for people who want to control their spending." Credit cards are such a problem for so many people. If more Canadians used these cards instead of credit cards, they might think twice before they spend,” says Walkington."They need to be sure they have enough money on their cards for what they want to purchase.”

The problems with prepaid credit cards
But there are cons. While these credit card look-alikes may feature the logos of companies such as Visa or MasterCard, calling them credit cards is a misnomer, says Julie Hauser, a spokesperson for the Financial Consumer Agency of Canada in Ottawa. That's because the card issuer isn't offering credit; cardholders spend their own money that they load onto the cards."There is neither credit nor debit associated with these cards. Basically, they are just another form of cash and don't help build your credit history in any way." (If you really want to rebuild or establish your credit history, you should opt for a secured or joint credit card instead, says Hauser.)
And, as with any financial product, you need to read the fine print. Prepaid cards are typically loaded with fees. Bieber's card, for example, has a $3.95 monthly fee, 75-cent loading charge, $1.50 ATM charge per withdrawal, $3 inactivity fee if it isn't used for 30 days and $7.95 replacement fee if it's lost.
Another problem is that it can be difficult to keep track of the cards' balances. William Fulton, a retired professor from Hamilton, received a $75 Visa gift card and used it to buy some wine and groceries. However, when he pulled out the card to pay for his dry cleaning a few weeks later, the card was rejected for having insufficient funds.
"It was very annoying, because there was no easy way for me to figure out the balance,"says William."I ended up tossing out the card, even though there were likely still a few bucks left. It makes you wonder where all that money goes.”

Smart Cards
• Be sure to read the terms and conditions for the card.
• Don't wait too long to use the card. Some cards have dormancy and/or expiry fees, and it's easy to forget about them in your wallet.
• Remember: Nothing is stopping you from loading money onto a regular credit card. You won’t get any interest and you will save on service fees. Plus, treating a credit card as a debit card will help you avoid debt.

We've got lots more information about credit cards, including how to save money on fees.
This story was originally titled "Fantastic Plastic?" in the September 2013 issue.

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