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The New Rules for Prepaid Credit Cards

The Department of Finance recently introduced new rules on prepaid credit cards. The new rules were put in place in response to numerous consumer complaints from excessive fees eating away at card balances to expiry dates. Similar to rules introduced on gift cards a few years ago, prepaid credit card issuers now have to abide by the new rules on new cards, as well as existing cards.

What are Prepaid Credit Cards?

In our increasingly cashless society, prepaid credit cards are yet another alternative to cold, hard cash. Unlike traditional credit cards, there are no costly interest charges to worry about; prepaid credit cards come pre-loaded with funds, so you never have to worry about carrying a balance.

In recent years, prepaid credit cards have become a popular choice as a source of emergency funds for students going away to university. Prepaid credit cards offer flexibility and convenience; funds can be easily withdrawn from ATMs or the card can be swiped to make purchases at retailers.

Pros:

  • Unlike a traditional credit card, you don’t require a credit check to be approved;
  • There aren’t any costly interest charges to worry about;
  • Pre-loaded with funds to make purchases and withdraw funds from ATMs; and,
  • It is a good budgeting tool for students who can have cash on-hand without worrying about going into debt.

Cons:

  • You don’t earn reward points for making purchase;
  • It can be difficult to spend the remaining balance when there’s a small amount (under $10); and,
  • Unlike a traditional credit card, you don’t build a credit history; this can cause you problems later on when you apply for a mortgage or car loan.

An Overview of the New Rules

Starting May 1, 2014, the rules surrounding prepaid credit cards will be a lot clearer for consumers. One of the major complaints of prepaid credit cards is that they come with a host of hidden fees that can dwindle down the card’s balance. Under the new rules, those hidden fees are no more – card issuers must spell out fees in a clear and concise manner.

The following are the new rules prepaid credit card issuers must abide by:

  • A ban on maintenance fees for the card for at least one year after the card is activated;
  • A ban on assigning an expiry date to prepaid cards;
  • A requirement that federally regulated financial institutions disclose a list of all the fees associated with the card in an information box that is printed in a visible location on the card’s packaging; and,
  • A requirement that all other key information be given to the consumer before the card is issued in a manner that is “clear, simple and not misleading”.

How Consumers Will Benefit

The biggest changes under the new rules are the ban on excessive fees and the elimination of expiry dates. Before the new rules, card issuers could slap on an expiry date; if the cardholder didn’t use up the funds before then, the funds would disappear. This can be especially worrisome, since a lot of parents give prepaid credit cards to their children for emergencies; when their child needed the funds, the balance could be completely wiped out.

The Financial Consumer Agency of Canada (FCAC), an independent government agency that provides programs and information to help consumers understand their rights and responsibilities when dealing with financial institutions, will be responsible for enforcing the new rules. If you have a question regarding the new rules or to file a complaint, you can reach FCAC toll-free 1-866-461-3222 or by visiting its website: itpaystoknow.gc.ca.

Conclusion

The new rules introduce some must needed transparency to prepaid credit cards. If you were wary about using prepaid credit cards before due to their fees and expiry dates, you should consider giving them a go under the new rules.

Have you ever used prepaid credit cards before? Do you have any horror stories to share about your balance expiring? Would you consider using them under the new rules?

About the AuthorSean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

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About the author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

{ 5 comments… add one }
  • Alexis S. May 22, 2014, 5:32 pm

    Thanks for letting us know, Sean. Personally, I’m more comfortable with using prepaid credit cards so I don’t overspend and rack up debt. I’ve had some unpleasant experiences with the hidden charges though. I’m really glad that they’re now required to disclose the list of fees to customers. Thanks again!

  • Thanks for the comment, Alexis. Prepaid credit cards are also great for students. It’s a lot better than giving your son or daughter a credit card they can go crazy with at your expense! Trust me, I’ve been there.

  • A Frugal Family's Journey May 23, 2014, 1:44 am

    I agree that this is a good tool for students and young kids. I suppose you can maybe also use these to limit yourself on certain spending categories that you typically overspend on. Kind of like using an envelope system I guess. But for many, this is simply a restrictive debit visa card. :)

  • Geoff May 26, 2014, 4:19 pm

    I’ve been given prepaid credit cards as a gift before. The pro is they are easy to use at places.. sort of.

    You have to use the prepaid gift card, before other means of payment. So you need to know the math of what your buying and what’s available on the card. (this is hard to do at a restaurant, for instance).

    We found it was just easier to spend the gift cards on stocking up on booze, going to cashier and putting $50 off the prepaid card, and then the rest on mastercard.

  • Frank Moreau June 20, 2014, 6:04 am

    The main problem I have with these cards is that you are essentially paying fees to use your own cash without any real attached perks. At least with a bank you develop a relationship and improve your borrowing capacity for the fees

    A very well written and informative article. :) And congratulations on meeting the one million goal! :)

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