Prepaid credit cards can serve as a budgeting tool, and are an easy and convenient way to make online and in-store purchases. With prepaid credit cards, you can only spend what you load onto the card – allowing you to take control over your spending. Let’s take a look at how prepaid cards work, and how you can use them to build credit.
Understanding prepaid credit cards
Prepaid credit cards are a type of card that allows you to load funds onto it before using it to make purchases or pay bills. Unlike traditional credit cards, prepaid cards do not provide you with a line of credit. Instead, you can only spend the amount that's been loaded onto the card, so you face no risk of accumulating debt or interest fees.
Common misconceptions about prepaid credit cards
There are several misconceptions surrounding prepaid credit cards. Prepaid cards are often mistaken as not being “real” credit cards. While they do function differently from traditional cards, prepaid cards offer the ability to make purchases and can be used wherever credit cards are accepted. Another misconception is that prepaid cards are only for people with bad credit, which simply isn’t true. Anyone can use a prepaid card, regardless of their credit history. Lastly, there’s a misconception that prepaid cards do not offer rewards or benefits. Similar to traditional credit cards, many prepaid cards offer cash back and other competitive rewards.
Benefits of using prepaid credit cards
One of the primary benefits of using prepaid credit cards is the enhanced financial control and budgeting mechanisms they provide. With prepaid cards, you’re limited to spending only what’s been loaded onto the card. Also, prepaid cards offer added safety and security. Since your card isn’t linked to your bank account, your funds and personal information are protected if the card is lost or stolen.
Plus, you don’t need to worry about falling into debt or occurring interest because you’re not borrowing any money. Prepaid cards are also widely accepted, just like traditional credit cards, making them a convenient option for making purchases online and in-store.
What you can and can't buy with prepaid cards in Canada
Prepaid cards can be used to make a wide range of purchases of goods and services in Canada. Here's a breakdown of what you can buy:
Everyday purchases: Prepaid cards are great for daily expenses, like purchasing groceries, covering bills, and buying gas. You can also use them at restaurants and for making retail purchases.
Online purchases: Prepaid cards can be used for online purchases, such as shopping on e-commerce platforms and buying digital items such as music, games, apps, and subscription services.
Travel expenses: Prepaid cards offer a convenient way to cover travel costs like plane tickets, accommodations, and rental cars. Many also allow for transactions in foreign currencies, which is handy when travelling internationally or online purchases from foreign vendors.
ATM withdrawals: Many prepaid cards allow you to withdraw cash from designated ATMs.
Here's what you can't buy:
Pay at the pump: Many retail-based prepaid cards are not accepted for pre-paying at gas pumps.
Gambling and adult entertainment: Most prepaid cards don't let you make payments on gambling or adult entertainment websites.
Investment products: Prepaid cards are not suitable for buying products like stocks, bonds, or mutual funds.
Using prepaid credit cards with bad credit in Canada
If you have bad credit, using prepaid credit cards correctly can help by building your credit score in Canada. Here are the best practices for getting, using, and getting the most out of your prepaid credit card.
Prepaid cards as solution to bad credit
If you're dealing with a less-than-perfect credit history, prepaid cards can offer a way to help manage your finances. Unlike traditional credit cards, prepaid cards don't rely on your creditworthiness, and you can get approved even with bad credit.
Improving your credit score using prepaid credit cards
Using a prepaid credit card can help you improve your credit score. By using your card responsibly and maintaining a good payment history, you’re demonstrating smart credit use. KOHO’s Credit Building actually reports your payment history to the credit bureaus – helping you to improve your credit score overtime.
Using prepaid cards responsibly
Using your prepaid credit card wisely helps ensure your credit score doesn’t decline. Stick to your budget, only load what you can afford to spend, and make timely payments if the card charges fees. With responsible use, you can work towards improving your credit score, especially with these tips for building credit – without using a traditional credit card.
The process of applying for a prepaid card in Canada
Applying for a prepaid credit card in Canada is pretty straightforward. Choose a card that suits your needs, whether for budgeting, online shopping, travel, or all of the above. Then, fill out the application, which is usually online, with your personal details. Some cards may require identification verification. Once you’re approved, you can load funds onto the card and use it however you want.
Can I pay bills with a prepaid card?
Yes, you can easily pay your bills with most prepaid credit cards. Some prepaid credit cards allow you to set up pre-authorized debits (PADs), which is useful for paying things like car insurance or monthly subscriptions, such as Netflix. KOHO’s Prepaid Mastercard allows you to issue up to 20 PADs in a 30-day rolling period, so you can cover your bills and subscriptions with ease.
But, keep in mind that prepaid cards from retailers, like grocery stores and convenience stores, tend to have stricter limitations. For example, Vanilla Prepaid, Joker Prepaid, and American Express Prepaid don’t support recurring PADs.
To use a prepaid card for bill payments, make sure your card has enough funds. Then, access your biller's payment platform, enter your payment details, select “Credit Card” or “Debit Card” as the payment method, and input your prepaid card information, followed by completing the transaction as you would with a regular credit or debit card. Always confirm the payment was successful, and keep track of your card's balance to avoid late fees and service disruptions.
Can I buy from online stores with prepaid cards?
Yes, you should be able to use your prepaid credit card online and in-store, wherever its payment network is accepted. For example, KOHO’s Prepaid Mastercard is accepted anywhere Mastercard is, just like Visa’s Reloadable Prepaid Credit Card is accepted anywhere Visa is.
But, the difference with KOHO’s prepaid cards is that you also get instant access to your virtual card. Virtual cards make shopping online easy and secure, since they are stored in your phone or on your computer – and are linked to your actual card. When making a purchase, virtual cards generate new, temporary card numbers, so your real numbers are never exposed to potential data breaches.
Can you use a prepaid credit card on Amazon?
Yes, Amazon.ca lets you use prepaid cards for the majority of purchases but some restrictions still apply. Most notably, you can’t combine a prepaid credit card with a regular credit card on a single order.
Can I make high-value purchases with a prepaid card?
It depends on what the maximum transaction limit is on your card. Prepaid cards have a limit on the amount that can be spent in a single transaction and a daily cap on the total transaction value. As a result, prepaid cards are not always suitable for making high-value purchases, like a car or a vacation. Every card is different, and these limits differ depending on the card issuer, so you’ll want to review your card agreement before making a significant purchase.
For example, the EQ Bank Card has a single and daily transaction limit of $5,000 and a single and daily ATM withdrawal limit of $500. KOHO's Prepaid Mastercard has a daily transaction limit of $9,000, a daily ATM withdrawal limit of $1,010.
To make high-dollar purchases with a prepaid card in Canada, verify that the card's balance is sufficient to cover the purchase amount. Then, use the prepaid card like a regular credit or debit card, providing the card details and completing the transaction through the merchant's payment system.
KOHO's prepaid credit building cards
KOHO's reloadable Prepaid Mastercard helps you spend within your means and comes with special perks, like 1% cash back on things like your grocery run or Uber ride. KOHO also offers flexible Credit Building – which is perfect for building your credit score in Canada. Credit Building allows you to deposit your own money as a line of credit and repay it. KOHO will report this to the credit bureaus each month as repayment history, effectively helping you build your credit history.
Some other advantages of using KOHO's prepaid credit cards are:
Budgeting control: Load only the funds you plan to spend
No application or approval: Get instant approval for instant spending with a virtual card
No fees: KOHO's cards offer competitive fee structures, with minimal to no fees for most transactions
No hard credit checks: KOHO only conducts a soft credit check, so your credit score isn't affected
Track changes to your credit score: KOHO offers financial management tools and insights, allowing you to track spending, set savings goals, and manage your finances effectively.
The bottom line
Prepaid credit cards offer convenience, flexibility, and control for Canadians looking to manage their spending wisely. By understanding the benefits and limitations of prepaid credit cards, you can use them to save more for the future, and make good financial decisions. If you’re looking for more ways to build credit in Canada, check out our guide on how to improve your credit score.