Why You Should Avoid Prepaid Cards

Robb Engen
by Robb Engen August 14, 2015 / No Comments

Prepaid cards are like debit cards but they have their own set of rules and restrictions. These cards are marketed toward students and low-income earners with a history of poor credit as an alternative to traditional bank accounts and credit cards.

On the surface, prepaid cards seem like a good way to spend money without going into debt. That makes them ideal for post-secondary students; parents just preload a card with a fixed amount and don’t have to worry about their child living beyond his or her means. Once the money is gone, you can’t use the card again until you load more cash.

But prepaid cards come with hidden fees that aren’t apparent unless you comb through the terms and conditions. Activation fees, monthly service fees, ATM fees, and transactions fees can eat up a good chunk of the money on your card. This suggests that a prepaid credit card might not be the best option. Instead you may want to consider a no fee credit cardstudent credit card, or secured credit card. Here’s a look at what RateHub recommends for students and those with poor credit:

Our choice for students: Scotia SCENE Visa Card

Scotiabank SCENE Visa


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  • Get 4,000 bonus points (4 free movies) with your first SCENE credit card purchase
  • Earn 1 SCENE point for every $1 spent on the card
  • Earn 5 SCENE points for every $1 spent at Cineplex Theatres
  • No annual fee
  • 19.99% interest rate

Our choice for those with poor credit: Peoples Trust Secured MasterCard

Peoples Trust Secured MasterCard


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  • $69.60 annual fee ($5.80/month; collected monthly)
  • 12.99% interest rate on purchases
  • 24.5% interest rate on cash advances
  • Deposit equal to credit limit ($500-$25,000)

A question about prepaid cards

I recently received an email from a reader named Carmen asking about prepaid cards. She wrote:

What do you think about the Canada Post Prepaid Visa Card?

From what I understand, this card can be used for purchasing online. Is a prepaid card a good option, since it’s more affordable than a credit card?

My first question for Carmen: where do you bank? Most of the big banks (TD, Scotia, CIBC, and RBC) offer a Visa Debit card, which acts just like a regular debit card but you can use it like a Visa to shop online or to book a flight or hotel room.

I would avoid the Canada Post Prepaid Visa card. Take a look at the fees associated with this card:

  • Card purchase fee (activation) – $15.00
  • Monthly service fee – $3.00*
  • Reload fee – $3.00
  • ATM & cash advance – $2.00**
  • Foreign currency conversion – 2.5%

*Fee will be deducted from your card balance at the beginning of each month

**The ATM service provider may charge an additional fee

Visa, MasterCard, and American Express all offer prepaid cards with different features so you’ll have to do your research to compare them. Most come with a host of unnecessary fees that should be avoided.

Final thoughts

Despite their many disadvantages, prepaid cards are growing in popularity and are heavily advertised around the holiday season and for students to use while they attend university or college.

They’re promoted as a budgeting tool that allows parents to control how much their child spends and makes it impossible to go into overdraft or unwanted debt. The cards also give parents a way to get money to their child in a pinch.

A better approach for mom and dad is to buy regular store gift cards that come without fees and expiry dates. A gift card to a grocery store chain like Loblaw or Sobeys can make sure your child is eating well while he or she is away studying.

Alternatively, you can always send money with an Interac e-Transfer; it will cost the sender up to $1.50 each time but it’s free for the recipient and beats the extra fees that are attached to prepaid cards.

Flickr: Chris Potter