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7 myths about prepaid cards

By Daniel Workman and Kristen Frisa

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Prepaid cards are often touted as a tool to help consumers spend within their means. You load the cards with exactly the amount you can afford to spend and once the balance is zeroed out, you can't spend any more. Plus, you can purchase prepaid cards with your rewards card, so you don't miss out on the points.

But what exactly are prepaid cards, and are they worth using?

According to a 2015 survey by The Canadian Prepaid Providers Organization (CPPO), a fifth of Canadians use gift cards to set personal spending limits when they shop, and after learning the benefits of open-loop prepaid cards, over half (55 per cent) said they would consider using one. prepaid-cards-better

A prepaid card may be a better choice, because unlike store-specific gift cards, prepaid cards are branded with the American Express, Mastercard or Visa insignias. That means you can use them anywhere that accepts whichever brand you're using.

Nadia Graham, credit counsellor at Credit Counselling Society, agrees that pay-first cards can be useful for keeping spending on track.

"A prepaid card can be a good idea, especially for things like Christmas," says Graham. You decide on your budget, and load the card with that amount. "When that's done, you're done shopping."

There are different types of prepaid credit cards, including those that are reloadable and those that are given by companies as promotional items. Each type has different regulations regarding the issuers' responsibilities.

Here are seven of the most perplexing myths surrounding stored-value cards:

Myth No. 1: Prepaid cards replace credit cards.
Although they physically resemble credit cards, prepaid cards are funded by upfront funds only. Consumers often confuse prepaid cards with credit cards because both display credit card company logos.

While some prepaid cards can be embossed with the cardholder's name (for a fee), most are anonymous, require no application or credit check and cannot be used to set up recurring bill payments or make preauthorized deposits on high-priced goods or services.

Generally, prepaid cards have expiry dates. While the card can expire, however, it's important to note that the balance cannot.

The Financial Consumer Agency of Canada (FCAC) says banks that issue prepaid cards "may not set an expiry date on the funds loaded onto them. The product itself can have an expiry date. There may be a fee to transfer the funds and to issue a new card."

The exception to this rule is if the prepaid card is a promotional product, in which case the funds can expire along with the card.

Before buying any prepaid card, carefully read the cardholder agreement for all terms and conditions.

Myth No. 2: Prepaid cards are universally accepted.
Many shoppers assume that you can automatically use prepaid cards at retailers just because they accept specific credit card brands. That's not always true.

If your card has the phrase "Electronic Use Only" on the front, merchants that depend on manual imprint machines to process their card transactions cannot accept it.

If you're going south of the border, a prepaid card is often a good idea, especially if your debit card will not work in the United States and you want to avoid foreign transaction fees on your credit card.

But you'll have to be careful to read your prepaid card's fine print.

Some prepaid cards are accepted in the U.S., but domestic prepaid cards state "Valid only in Canada." Prepaid travel cards are often redeemable worldwide, but some prepaid card companies disallow purchases at casinos or on cruises.

You can, however, use prepaid cards for phone and online orders. A customer service rep told CreditCards.ca that Amazon.ca accepts brand-name prepaid cards just as it would credit cards. Shoppers simply furnish the prepaid card number and match the registered billing address and can make a default entry should the prepaid card lack an expiry date.

Confirm in advance which prepaid cards an intended shopping destination accepts.

Myth No. 3: Prepaid cards save you money compared to credit card interest.
Prepaid cards don't charge interest, but other fees can add up quickly.

Graham says there are cards out there with few fees, but you should research the fees carefully before purchasing a prepaid card.

The Iridium Mastercard is advertised as a low-fee prepaid product. But even with its comparatively low $3.99 price tag and $2 load fee, and a monthly service fee of $2.49, costs can easily surpass 20 per cent for a $25 card. A wide range of other fees, including live service support, could push prepaid card expenses to well over 70 per cent of the card's face value.

Other prepaid cards impose even higher fees. Carefully compare all expenses before deciding whether the benefits of a brand name card justify those costs.

By regulation, the card's exterior packaging must prominently display fees incurred by its use. 

Myth No. 4: Prepaid cards improve your credit.
Claims that prepaid cards improve the buyer's credit rating are false advertising, according to the FCAC.

It's important to distinguish between prepaid credit cards and secured credit cards. Secured credit cards also are loaded with a deposit that you must pay upfront, but they are bank-issued.

"They are totally different," said Katrina Gordon, account manager at Credit Canada Debt Solutions. "If you're trying to rebuild credit or you haven't had credit before, secured cards are a true credit card, and will report on your credit report."

As non-credit products, prepaid cards don't directly boost credit scores. Still, prepaid cards can force shoppers to develop disciplined spending habits, since you can reload the card with a set amount, and spend only what you've loaded. This is often the first step to using a credit card responsibly, so a prepaid card can be a kind of "baby step" before you jump into credit.

Myth No. 5: Card activity is reported automatically.
Forget about receiving a printed update of card transactions in the mail. The responsibility for tracking ongoing prepaid balances falls squarely on the consumer's shoulders.

Fortunately, prepaid cards offer other ways to monitor ongoing card balances. These include online statements, phone inquiries and in-store updates. Online statements are often free, while other customer service requests incur hefty fees that shrink available card balances.

If you're hoping to use your prepaid card as a tool for keeping spending in check, you will need to do the heavy lifting. Gordon says just because there's a limited amount you can spend, doesn't mean the prepaid card is doing the budgeting for you.

"Once the money is absorbed you can't use it anymore, but unless you're tracking it and budgeting, you don't really know if it's helping your spending habits," she says.

"There's no point putting money on a prepaid credit card and saying, ‘This will help me keep on budget' if you don't know how much is going out the door every month, and how much you have to budget for that particular area," said Graham.

Myth No. 6: Prepaid card purchases are ineligible for refunds.
Like other payment methods, prepaid cards qualify for reimbursement on returned merchandise. Most cardholder agreements specify that individual store policies determine whether buyers will receive replenished credit on their prepaid cards.

Similarly, consumers must resolve disputes directly with the merchant involved. Before issuing refunds, sellers typically require consumers to present the prepaid card used for the original purchase.

Even after expiry, keep depleted prepaid cards together with receipts for possible returns.

Myth No. 7: Lost or stolen prepaid cards are protected.
If you register prepaid cards with customer service, card companies will generally issue replacements for lost or stolen cards. Unused balances are transferred to re-issued cards.

CPPO's website states, "Open-loop prepaid cards can be replaced if lost or stolen per the card network's zero liability policies."

However, card replacement fees - ranging from $10 to $20 - can erase any transferable value. Plus, there may be no reimbursement available for amounts debited before the issuer is notified about the missing card.

You must also specify the lost or stolen card number, so if you haven't written it down and kept it in a secure place, you're out of luck.

See related: Feds make changes to prepaid card rules; Beware prepaid, gift card fraud; Are virtual prepaid cards right for you?


Updated: June 22, 2017