Prepaid credit cards can help with impulsive or emotional spending: Experts

TORONTO — Ellie Clin uses a Wealthsimple Cash prepaid Visa to pay for gifts, takeout, groceries, entertainment and other non-essential expenses and saves her bank’s Visa card for larger purchases and monthly bills. 

“I’ve never been good at formal budgeting with spreadsheets and receipts. When I was using my main bank account for personal and entertainment spending, I found there were some months where I’d go to pay my Visa bill and gulp because I knew I had overspent,” said Clin, a 35-year-old program director in Kitchener, Ont.

“I like being able to just look at the balance in my Cash account and have a simple yes or no answer to whether or not I can afford something at the moment.”

Clin isn’t alone. 

The prepaid credit card market in Canada is expected to see rapid growth in the new few years. According to an October 2021 study commissioned by the Canadian Prepaid Providers Organization (CPPO), the number of open-loop prepaid accounts in Canada is expected to double to 93 million accounts by 2025. Open-loop prepaid cards are prepaid cards that can generally be used anywhere those cards are accepted. Closed-loop cards, on the other hand, typically only work with one company.  

Prepaid credit cards, which allow users to load a set amount of money onto the card, can be beneficial for people who struggle with impulsive or emotional shopping and need more structure, said Liz Enriquez, a personal finance mentor for Canadian millennials at Ambitious Adulting in Hamilton, Ont.

“There are some people who recognize that they’re just not good with credit cards, but they want to be better at their personal finances.”

While people have traditionally been advised to cut up credit cards for overspending, it’s harder to do so nowadays when so much spending happens online, especially during the pandemic, Enriquez said. 

“Credit cards are almost a necessary tool, especially for younger generations who grew up not using cash as much.”

For people looking to become debt-free, or avoid going into debt, the set limit of a prepaid credit card can help with self-discipline, she said.

While revolving credit cards only require a minimum payment each month, prepaid cards create a mindset shift because you’re only working with money that you actually have, which creates a forced spending or budgeting plan.

That’s also why some prefer prepaid credit cards over debit cards — it puts a strict limit on how much you can spend on certain spending categories that the card is intended to pay for. And, spenders don’t risk accidentally dipping into money meant for rent, bills or other expenses. 

Additionally, prepaid cards are helpful for Canadians who have bad credit and aren’t eligible for traditional credit cards, Enriquez said. Since prepaid cards don’t require a credit check, they can be used like a typical credit card to online shop, book hotels and more.

One thing to watch for, however, is that many — but not all — prepaid cards can include fees, such as for annual dues, account inactivity, certain ATM use, card replacement and foreign exchange.

Enriquez said fees shouldn’t be a deterrent, however, since many credit cards also charge fees. 

“You just have to pick and choose what you want,” she said.

For Clin, the main disadvantage to her prepaid card is that there’s a limit to how much money she can transfer at a time and store on the account.  

“Wealthsimple’s instant deposit feature means I don’t have to wait for the funds to fully transfer from my bank account before I’m able to use them, but it’s a limited amount,” Clin said.

“One time when I tried to add more than the instant deposit amount imposed by Wealthsimple, it took more than five business days to appear on my Cash card but [the money] had already been withdrawn from my bank account and I had no access to those funds for over a week. So it takes some financial agility and enough cash flow to have the patience to move your money around.”

This limits the number of large payments I can use the prepaid card for, Clin adds.

Despite its limitations, Clin said the benefit of having a separate account for personal and entertainment expenses is still worth it, given her aversion to stricter budgeting.

“In a way, the limit on that instant deposit feature is a really simple way to limit my personal and entertainment spending overall, since it means I’ll give appropriate pause and think over any larger purchases and whether I really have the funds to cover them.”

This report by The Canadian Press was first published Feb. 22, 2022.

Leah Golob, The Canadian Press