The best prepaid credit cards
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Discover the methodologyDid you know that there are many alternatives to traditional credit cards? Some Canadians struggle to qualify for a traditional unsecured credit card because they have a bad credit score or no credit history at all.
A prepaid credit card may be an option for you if you are unable to qualify for a traditional credit card, but need the convenience of a credit card. It can be an effective way of sticking to a budget too. It allows you to load funds that you have available and use the card just like a traditional debit card.
If you think a prepaid credit card may be a good option keep reading. This guide explored how they work, breaks down the most common questions and helps you find a prepaid credit card that works for you.
What is a prepaid credit card?
Over the last several years, prepaid credit cards have become a more popular banking solution for Canadians. Prepaid cards have many advantages. They provide a way of using the money you already have, just like a debit card. Among other things, this allows people with bad credit scores and who may not qualify for traditional credit cards to make purchases with a card. They act as a compelling alternative to traditional credit cards.
A prepaid credit card works almost identically to a traditional debit card. Unlike a credit card, you can’t spend more than your available funds, but you can use your card at merchants in person or online. Prepaid cards almost always have a Visa or Mastercard logo meaning your prepaid card is a part of their network and you can use it wherever Visa and Mastercard are accepted.
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How does a prepaid credit card work?
Similar to traditional debit and credit cards, prepaid cards can be used to make online and in-person purchases. You can even use them to withdraw cash from an ATM. Some users use a prepaid credit card as a budgeting tool. When you load your prepaid card, you are unable to spend beyond that amount until you load the card again.
A few keynotes on prepaid cards to keep in mind:
- They are not debit cards. You may have heard a prepaid card referred to as a prepaid debit card. A debit card is linked to a checking account, while a prepaid credit card is not.
- They are not credit cards. They work similarly to credit cards but their purchases are not subject to interest charges and your history is not reported to any credit bureaus. Spending with a prepaid card does not influence your credit score, positively or negatively.
The pros and cons of prepaid cards
Prepaid credit cards come with advantages and disadvantages just as any card may:
Pros of prepaid credit card
- You do not need to have good credit to purchase a prepaid credit card. If your credit is poor, or you do not qualify for a traditional unsecured credit card, you can still purchase a prepaid card. There is no credit check for prepaid credit cards.
- You do not need to apply for a prepaid card. Prepaid cards are often given out as gifts that anyone can use. For example, parents may give them to their children for this reason.
- They have a specific limit that can be refilled at any time. This is a good way of making sure you are sticking to your budget and not accruing debt.
- There are no late penalties, interest charges or monthly payments.
Cons of prepaid credit card
- Prepaid credit cards usually come with multiple fees such as purchase and activation/reactivation fee, ATM withdrawal fee, card replacement fee and fees for when you reload the balance.
- Some merchants may not accept prepaid credit cards.
- Some prepaid cards cannot be used outside the country where they were activated. That means you may not be able to use your card for travel.
- If you spend everything on the card, you won’t be able to use it again until you refill it. Unlike a credit card, you wouldn’t be able to use it in an emergency.
- Lost or stolen cards are hard to redeem. Not only will you have to pay for a new card, but the funds already on them also may not be salvageable.
- You will want to keep the card number written down somewhere. With traditional credit cards, the card issuer can either give you a new card with the same number, or a new one. If you do not have your prepaid card’s number, and it gets lost or stolen, anything you have left on it will be gone for good.
- Your card history may not be reported to credit bureaus.
Does a prepaid credit card build credit?
Unfortunately, a prepaid credit card will not help build your credit. This is because no history is actually reported to the credit bureau. If you are looking for a budgeting tool and a card that allows you to make purchases at a merchant whether in person or online just like a debit or credit card, then a prepaid card may be right for you.
However, if your main objective is to build your credit, a secured credit card may be a better option as they will report directly to the credit bureaus.
Good to know
If you are looking for a credit card product to help you build your credit, check out our guide on secured credit cards.
What is the best prepaid credit card in Canada?
You may be looking for a prepaid credit card for yourself for a variety of reasons or you may also be looking to give a prepaid credit card as a gift to someone as it acts as cash versus a gift card to a specific store or brand. So which one is the best prepaid credit card in Canada? Here's our breakdown.
| Category | Prepaid credit card | Welcome bonus |
|---|---|---|
| Best prepaid credit card in Canada | KOHO Premium Visa | Earn a $20 cash bonus (t&c apply) |
| Best no annual fee prepaid credit card | KOHO Visa | Earn a $20 cash bonus (t&c apply) |
| Best no annual fee prepaid credit card with bonus rewards on purchases | Stack Mastercard | None |
| Best prepaid credit card to help the environment | MogoCard | None |
How much do prepaid credit cards cost?
The cost of a prepaid credit card will vary from provider to provider, however, expect fees. These may include monthly maintenance fees and fees to withdraw from an ATM. Some financial institutions may also charge you a fee when you reload funds.
Check out a breakdown of provider KOHO and their Visa Prepaid Card offer to get a better idea of the charges you can expect.
| Card | KOHO Prepaid Visa |
|---|---|
| Fees | No fees for the KOHO and KOHO Joint accounts, $9 per month or $84 per year for the KOHO Premium account |
| Cashback | 0.5% for KOHO and KOHO Joint, 2% on certain purchases for KOHO Premium |
| Spending limit | $4,000 of purchases per day |
Where can I buy a prepaid card?
If you want to buy a prepaid credit card you can do so in a few different ways.
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Alternatively, some convenience stores and grocery have Visa and Mastercard available for purchase.
You can also find Visa prepaid credit cards at many financial institutions including:
- CIBC
- Desjardins
- DirectCash Bank
- People’s Trust Company
How do I use a prepaid card online?
You can use your prepaid card online just like a normal credit or debit card. When you go to make a purchase online, simply put in the card number, expiration date, and CVV (the last three numbers on the back of the card).
Depending on the merchant, you may have to enter personal information such as your address, however, that information can be added when you activate your card.
Can I reload my prepaid card?
If you have a reloadable prepaid card and need to add funds to your card, you have a few different options.
- Arrange for your paycheck to be directly deposited onto the card
- Transfer money from a checking account to your prepaid card
- Add funds at certain retail locations or at the financial institution that provides the card
Always be sure to check with the financial institution you get your prepaid card from before you take one out to make sure you can easily add funds as needed.
How do you activate a prepaid card?
Once you receive your prepaid credit card, depending on the financial institution, you have a few different ways to activate your card.
- Call the activation number which can be found on the sticker on your brand-new card. You will be asked for the card number and personal information before activation as well as activating a PIN.
- Online. You will also have to enter card information and you may also be asked for personal information and to establish a PIN.
Once your card has been activated, you are free to use your card accordingly.
What to do if my prepaid card is stolen or lost?
If your prepaid card is lost or stolen, immediately report it to the financial institution that issued it. You may not get your money back for transactions made before you reported the card lost or stolen, so it is crucial to report the lost or stolen card as soon as possible.
With that said, you may not have to pay for any unauthorized transactions if your prepaid card is covered by a zero-liability policy or fraud protection guarantee.
Cards that may have these protections are generally:
- Registered
- Reloadable
- Issued by federally regulated financial institutions
- Part of a payment network such as American Express, Mastercard or VISA
As always, be sure to read the fine print that came with your prepaid credit card for any further instructions.
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