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The world of personal finance has continued to change, sometimes in amazing ways, over the last decade or two. From innovations of prepaid cards, online transactions, and credit card improvements, there are more options than ever before. You, like most people, have probably gone mostly cashless these days – and that probably means you either use a debit card or a credit card for most of your daily spending.
They both definitely have their advantages; a debit card is a simple way to use your own cash, but you might have trouble shopping online and while travelling. Alternatively, debit cards offer a simple super way to buy things on the internet or when you’re abroad, but some people might get into trouble by overspending the credit. Think of prepaid cards as a hybrid of debit cards and credit cards. They combine all the benefits of both into one, easy-to-use card.
If you have questions about what a prepaid card can do and what prepaid cards offer in terms of use and rewards then you have come to the right place. KOHO is an emerging leader in the financial sector and offers several prepaid cards and financial options. Understanding how prepaid cards work and what a prepaid debit card and prepaid credit card pros and cons are is key to your financial future. Read on to learn more.
Prepaid Cards vs. Regular Cards
Are you tired of carrying cash everywhere you go? Want to make online purchases without a credit card? Prepaid card options might just be the solution you're looking for. In this blog, we'll explore the world of prepaid cards and compare them to regular debit cards, highlighting their benefits, usage, and how they can even improve your credit score.
A prepaid card is essentially a card that you load with money before using it for everyday purchases They work just like regular debit cards, except you don't need a bank account to use them. With prepaid cards, you have more control over your spending and you can't spend more money than what you load onto the card.
And they can be used anywhere that credit cards are accepted. So, that means online shopping with your own money instead of having to use a line of credit and rank up debt. You can control your spending with prepaid cards and limit your spending with better certainty by using your bank account and direct deposit top-offs to manage what funds you have access to.
Our KOHO cards are prepaid Mastercards, so you can use them wherever Mastercard is accepted (and that pretty much means you can use them anywhere in the world).
And while you can’t typically use prepaid cards to build credit, we’ve created a unique feature, called Credit Building, which you can use to build credit safely and securely. Credit Building can be used in two different ways – either by using a KOHO line of credit or your own funds as a secured line of credit. A cool feature is that you can choose to use both methods to build your credit history even faster. Whichever method you choose, there’s no interest, no applications, and guaranteed approval.
Where Can You Use A Prepaid Card?
The short answer is: pretty much anywhere! While some debit cards are only accepted in your home country (and often not accepted by online retailers), prepaid cards are accepted anywhere that credit cards are accepted. The widespread acceptance of prepaid card accounts only fuels the popularity and demand for more options and access to prepaid cards. Understanding the options provided by prepaid card issuer and financial institutions can help users better access and manage their funds. Throughout Canada, most businesses that accept Visa cards, debit cards, or other credit card options will accept a prepaid card transaction.
Whether you're making online purchases or shopping in-store, a prepaid card is a convenient option. You can also use prepaid cards for international transactions, making them ideal for travellers. Prepaid cards are safe and easy to use rather than carrying cash everywhere with you while you are travelling.
Oh, and speaking of travelling. Since KOHO cards are on the Mastercard network, they’re accepted everywhere that accepts Mastercard or other prepaid credit cards. And that means you can use your KOHO card in over 210 countries. You can travel with confidence knowing your prepaid card is accepted and your bank account funds are protected while you are traveling.
What Can A Prepaid Card Do For Your Credit?
To understand the impact of a prepaid card on your credit, it's essential to understand how credit scores work in the Canadian financial systems. There are several ways to build credit in Canada and smart use of a prepaid credit card is one of them.
Building and improving credit in Canada is essential for financial stability and access to better credit terms. Accessing lines of credit is easier when you have a good credit score and good credit standing. It is often easier to get approved for a prepaid card than a traditional line of credit so a prepaid credit card can help give you a way to start building your credit and improving your score right off the bat.
To continue improving your credit history and raising your credit score you will need to make conscious decisions and take steps that show you can manage money and that you can demonstrate your creditworthiness. Here are ten ways to build credit in Canada:
Open a credit card account: Consider applying for a secured or entry-level credit card or a prepaid card if you have no credit history. Make small, regular purchases and pay your balance in full and on time each month to establish a positive payment history and to show smart management of funds and bank account transactions.
Become an authorized user: Ask a family member or trusted friend with good credit to add you as an authorized user on their credit card account or bank account. Their responsible credit behavior can positively impact your credit history. You can also look at getting a joint prepaid card to help with this process as well.
Use a credit building service: Some financial institutions, including KOHO, offer credit building options and prepaid card options, or even lines of credit, designed for individuals with limited or poor credit history. These services typically have low or no-risk requirements and can help improve your credit score over time.
Pay bills on time: Consistently pay all bills, including rent, utilities, and loans, on time. Late payments can negatively affect your credit score. It is usually advisable to use your bank account rather than your prepaid cards to pay for larger purchases unless you can easily pay off the charges put on your prepaid credit card.
Keep credit utilization low: Maintain a low credit utilization ratio by using only a small portion of your available credit. Aim to keep your credit card balances below 30% of your credit limit, which is easier to do with a prepaid card where you control how much money is available on the card at any given time.
Monitor your credit report: Regularly review your credit report to check for errors or discrepancies. You can request a free credit report from Equifax or TransUnion once a year in Canada. Check your credit cards and accounts on your credit report to make sure there are no unauthorized accounts showing.
Diversify credit types: Having a mix of credit types, such as credit cards, installment loans, and retail accounts, can positively impact your credit score. However, only open credit accounts you can manage responsibly and remember that borrowing money and paying with a prepaid credit card is not something to do lightly.
Avoid multiple credit inquiries: Limit the number of credit applications you make within a short period. Multiple credit inquiries in a short time can negatively affect your credit score. You may also end up having to pay fees and higher interest rates when your score takes a temporary dip right after multiple credit inquiries.
Use a secured credit card: If you have difficulty obtaining an unsecured credit card, consider a secured credit card, where you provide a security deposit. Responsible use can help build credit and it is one of the reasons why prepaid credit cards are so popular and such a powerful tool for credit building.
Build a long credit history: Using your prepaid cards effectively and being responsible with balances and payments over time can positively impact your credit score. Avoid closing your oldest credit accounts, as they contribute to the length of your credit history and make smart use of the cards you have currently.
KOHO Credit Building covers a few of the above bases, including; opening a credit account, using a credit building service, paying bills on time, keeping your credit utilization low, monitoring your credit report, diversifying your credit types, avoiding multiple credit inquiries (since there’s no inquiry required to sign up for Credit Building), using a secured card, and building credit history.
It really is like having a superpower to build your credit.
Building credit takes time, and patience is key. Consistently practicing good credit habits and managing your finances responsibly will give you a stronger credit profile over time. It's also helpful to seek guidance from a financial advisor or credit counsellor if you're unsure about the best strategies to improve your credit in your specific situation. They can help you find the prepaid credit card options that are best suited for your individual and specific needs.
Tips For Using Prepaid Credit Cards In Canada
The first thing you should do, when opening up a prepaid credit card account in Canada, is to top up your balance. Think of this as your spending account. Load it up with enough funds you’ll need over a certain amount of time. Budgeting is a great way to help with this. Here’s a very easy way to get started with a budget, if you don’t already have one.
Start by calculating your monthly income, including your salary, side hustle income, and any other sources of money coming in. Next, track your monthly expenses. This includes fixed expenses like rent or mortgage payments, utilities, insurance, and variable expenses like groceries, entertainment, and dining out. Use a budgeting tool or app to make this process more manageable if you’d like, but a simple spreadsheet also works.
Categorize and Prioritize Spending: Organize your expenses into categories to get a clear picture of where your money is going. Categorizing expenses can help identify areas where you can cut back or reallocate funds to meet your financial goals. Prioritize essential expenses and allocate funds for savings and prepaid card utilization.
Create a Realistic Budget: Based on your income and expenses, create a budget that aligns with your financial goals. Ensure that it's realistic and sustainable. Be mindful of your spending habits and avoid setting overly restrictive budgets that may lead to frustration. Allow for some flexibility in discretionary spending when using your prepaid card.
Monitor and Adjust Regularly: A budget is not a set-it-and-forget-it tool. Regularly track your spending and compare it to your budget. Use financial tracking apps or spreadsheets to stay organized. If you find that you're consistently overspending in certain categories or falling short of your savings goals, adjust your budget accordingly. It's essential to adapt your budget to changing financial circumstances.
With a prepaid card, make sure to periodically check your card balance to avoid any surprises. Secondly, understand the fee structure associated with prepaid cards, such as annual fees and transaction fees, and learn how to avoid them. Lastly, educate yourself on Canadian laws related to prepaid cards, as well as your rights as a user and consumer protection measures in place. With KOHO prepaid credit card options, for example, your money is insured by CDIC for up to $100,000.
What Are The Pros And Cons Of the Best Prepaid Credit Cards?
No financial tool is perfect and prepaid cards are no exception. As with any financial product, prepaid credit cards come with their own pros and cons.
Some of the benefits of using a prepaid card include:
Acting a budgeting aid to prevent overspending, since you can only spend your own money.
They don’t require a credit check to open an account.
Prepaid credit cards are accepted online and pretty much around the world.
Some cons of prepaid card use include:
Lacking the ability to build credit (though KOHO allows you to build credit with Credit Building).
There can sometimes be fees involved (KOHO offers four different accounts – more on that later – ranging from totally free to $19/month).
Some don’t protect you from overdrafting your account, which means spending more than you currently have as a balance (KOHO does offer a service called Cover, which acts as overdraft protection, though).
KOHO Best Prepaid Credit Card Options
As we just mentioned, KOHO has a few different account options for your prepaid credit card. Here’s a quick little summary to help you choose the one that’s perfect for you compiled by our prepaid card issuer support team. (Don’t feel like reading all that? We’ve made it super easy to compare all four of our accounts here.)
Easy prepaid credit card online
Think of this as our starter account. Choose the Easy account if you like the sounds of:
Making the most of your money with no monthly fees
Earning 1% cash back on groceries and transportation
0.5% interest on your entire balance, from your Spendable to your savings
Up to $100K of your money earning interest is protected by CDIC
Free e-Transfers, no matter how many you send
Benefit from prepaid card features
Essential prepaid credit card account
Choose the Essential account if you’re into:
1% cash back on groceries, eating & drinking, and transportation
0.25% cash back on all other purchases
4.5% interest on your first $500 and 2% on anything after that
Credit Building for $7 / month instead of $10
Unlimited e-Transfers
Up to 5% extra cash back at selected merchants
Up to $100K of your money earning interest is protected by CDIC
Optimal prepaid card issuer support
Extra prepaid credit card services
The Extra account might be for you if want:
2% cash back on groceries, eating & drinking, and transportation
0.5% cash back on all other purchases
4.5% interest on your first $1000 and 3% on anything after that
No FX fees
Credit Building for $7 / month instead of $10
Unlimited e-Transfers
Up to 6% extra cash back at selected merchants
Up to $100K of your money earning interest is protected by CDIC
Full range of prepaid card options and support
Everything prepaid credit cards service option
And finally, our biggest and best account, Everything is for anyone who wants:
2% cash back on groceries, eating & drinking, and transportation
0.5% cash back on all other purchases
4.5% interest on your entire balance, from your Spendable to your savings
Credit Building for $5 / month instead of $10
Unlimited real-time e-TransfersNo FX fees
Up to 6% extra cash back at selected merchants
Up to $100K of your money earning interest is protected by CDIC
Prepaid card support and services
Summary of KOHO services and a CTA to get them to check out our guide on how to improve your credit score linking https://www.koho.ca/learn/how-to-improve-your-credit-score/
If you're considering a prepaid credit card, you might want to check us out. We’ve got a ton of different tools to help you improve your finances, including a guide to improving your credit score.