What are the benefits of prepaid cards?

You know about credit cards. With rewards, convenience, and the bank’s money to spend (and pay back), credit cards serve a definite purpose. But they’re not for everyone.

And you know about debit cards. The most standard card in your wallet, they generally replace the need for cash and they’re linked directly to your bank account. But they’re not the only option.

Enter: prepaid cards. You can think of them almost as the happy middle ground. With the benefits of a credit card but without the risks, and with the convenience of a debit card but often with lower costs.

Read on to learn more about prepaid cards, why they’re great, and how they’re useful.

What is a prepaid card?

Prepaid cards are a kind of middle-ground card between a credit card and a debit card. They don’t necessarily replace either – in fact, many people keep all three in their wallets.

Prepaid cards look and feel the same as debit and credit cards. They can be used in stores, at ATMs, or online, and you can have your paycheque paid into one from your employer.

In many ways, they function like a credit card – you can shop with them online or in store, and they’re often powered by the big credit card companies Mastercard or Visa, so they’re accepted basically everywhere. In other ways, they’re like debit cards – you can receive money into them from employers or anyone else, and the money you're spending is your own, meaning you’re not borrowing from a bank and going into debt.

With a prepaid card, you can only spend money you have loaded onto the card. You spend that money however you like, but you can’t spend past zero, so you can’t go into overdraft. When the money's all gone or any time you wish to, you simply reload more onto the card and keep spending as you need.

How are prepaid cards useful?

Prepaid cards are useful in a number of ways. They offer some of the best elements of credit and debit cards. And for certain people and certain circumstances, they’re pretty well the ideal card.

A prepaid card can be used practically everywhere. You load and reload money onto it, as needed, and spend however you see fit. Like a credit card, they’re widely accepted – but unlike a credit card, you don’t accrue any interest on purchases and there are far fewer associated fees. Like a debit card, they are convenient and you’re spending your own money – but unlike a debit card, prepaid cards don’t have to be associated with a bank or a chequing account, meaning there are fewer annual fees and there’s no way to become overdrawn and be charged additional bank fees.

These are some specific circumstances where prepaid cards are particularly beneficial:

Limit spending and avoid debt

Prepaids cards are excellent tools to help you save, stick to a budget, ensure you’re not overspending, and ultimately to help you grow wealth. If you struggle staying on top of your credit card spending (it can be difficult when it’s always available), or you find yourself regularly going into overdraft on your chequing account, a prepaid card can help keep your spending in check. With a prepaid card, you load your account with the amount you want to spend in a given time period, and that’s all you have until you reload it. This can be a great way to set aside your “play” money each paycheque, and ensure you’re not mindlessly spending.

Convenience for travel

Having access to any type of widely-accepted card – credit, debit, or prepaid – means you don’t need to worry about taking or converting cash when you travel. But most credit and debit cards will charge you high foreign exchange fees when you use them in countries outside Canada. That’s not always the case with prepaid cards, though. The KOHO prepaid Mastercard, for example, only charges up to 1.5% on foreign transactions fees (and the fee is waived entirely for Extra KOHO members). This helps you save money if you’re a frequent traveler.

Benefits (cashback, anyone?)

With some prepaid cards – like the KOHO prepaid Mastercard – you can earn some of the same benefits you get with credit cards. With the KOHO card, you earn cashback rewards on every purchase you make. You can earn up to 0.5% cashback on every purchase, and as much as 10% cashback with preferred partners. How good is that?

For children to learn

Prepaid cards can be a great launching pad for children on their financial journey. In Canada, you need to be the “age of majority” – 18 or 19, depending on where you live – to be eligible for a credit card. But there’s no age limit for prepaid cards. Giving a prepaid card to your child can be a great way to teach the importance of managing money, show them how to access and monitor their spending with account monitoring tools, and help them feel some financial independence. Opening a bank account and getting a debit card for kids is another option, though chequing accounts can come with additional fees.

Peace of mind

Prepaid cards are a secure alternative to credit cards. Unlike with a credit card, if your prepaid card is lost or stolen, you can simply move your money out of the account. Credit cards carry a little extra risk in that it’s credit that’s spent (or rather borrowed), so an unscrupulous person who got their hands on your credit card could quickly rack up unwanted charges you’ll need to deal with.

A credit card alternative

Not everyone is able to get a credit card. There are eligibility requirements not everyone is able to meet. A couple of the major eligibility criteria are income level (banks need to know you will have a regular source of income so you can repay the credit you spend), and your credit score (you need a good or excellent credit score to be considered for most credit cards). For people who don’t qualify for a credit card, a prepaid card can be a perfect alternative. You still have a lot of the same spending power in terms of where and how you use the card – online, in stores and restaurants, at ATMs, etc. – it’s just your own money on the card instead of borrowing the bank’s money like with a credit card.

Build your credit

If you don’t qualify for a credit card because of your credit history, you may want to build or repair your credit. Your credit score is important because it helps banks and lenders determine how safe you are to lend to. You need a good credit score if you want a credit card, if you want a large loan for a mortgage, and to secure rental properties in some cases. If you want to build your credit, KOHO can help – subscribe to Credit Building with KOHO, make repayments on time, and build your credit score in as little as six months.

Conclusion

Debit cards, credit cards, and prepaid cards all have their own pros and cons, and many people actually carry all three types of cards and use them differently, depending on the situation. Whatever your spending habits, you need to feel comfortable with the card you’re using in the moment. Each card has its role to play – it’s worth considering the useful role a prepaid card could occupy in your wallet.