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 Prepaid credit cards offer flexibility and convenience; funds can be easily withdrawn from ATMs or the card can be swiped to make purchases at retailers.
- 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.
- 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.
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 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.If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).