Credit Canada

Among the more insidious ways lenders have devised to get consumers to spend more is the prepaid credit card.

These look like ordinary credit cards but are preloaded with a certain amount of cash up front. There are no interest charges, so there's no way of spending more than the preloaded amount.

But like other aspects of a cashless society, the convenience of these cards comes at a price -- yearly membership fees, "reloading" fees and still more fees to make withdrawals from automated teller machines.

Prepaid credit cards have a five-year head start in the United States because 60 million Americans have no access to normal banking services, says David Eason, CEO of Toronto-based Berkeley Payment Solutions. As well, 10,000 U. S. financial institutions can issue Visa or Mastercards versus just 17 in Canada.

One of the earliest entrants in Canada was credit union Van City. Its prepaid Visa cards can be loaded with $25 to $500 worth of buying power. Announced in November, 2005, they were hailed as being "just in time for Christmas." Claiming a first in Canada, Van City said at the time the Canadian prepaid credit card market could be worth $2.4-billion.

One successful niche is the youth market, notably the MuchMusic Prepaid Mastercard, launched in March, 2007. These cards can be handy helping kids make online purchases or helping parents dole out money (and monitor purchases) while their children are travelling or at college.

Maybe too handy, given how much time modern teens spend on the Internet. Promoters claim prepaid credit cards help teens learn the basics of budgeting and financial management. Critics see them as a way to hook them on real credit cards.

MuchMusic's Web site says prepaid credit cards are not actually credit cards, "so you don't have to worry about getting carried away with your spending." Because the numbers on the card are not embossed, they can't even be used on old-fashioned imprint machines in stores. Children ages 13 to 15 can get the card if they specify their parents as account holders; those 16 or older can apply for their own.

There are no monthly fees, but the first-year "membership and activation fee" is $34.95 and MuchMusic dings you another $9.95 in year two. Unlike some rivals, there is no purchase fee each time the card is used but it costs $1.50 to load on more cash. There's also a $1 charge to withdraw cash from ATMs, above and beyond what the ATM owner charges. If the card expires, an inactive fee of $2 a month is charged against any funds remaining.

Nor is using it as simple as it may appear. Preauthorization may be required for hotel reservations or car rentals. MuchMusic notes the amounts of preauthorized transactions at restaurants or gas stations may vary from actual purchases, with the correct amounts not apparent until the transaction history is mailed out.

If they are merely glorified debit cards, why not bypass the fees and use real debit cards? I'd argue a teenager would be better off with a regular debit card that can be regularly reloaded for nothing through the simple expedient of holding down a part-time job and having the paycheque deposited automatically into their account.

Youth marketing expert Max Valiquette, president of Toronto's Youthography, says prepaid credit cards are "pseudo credit cards" that are priming kids to make the jump to real credit cards. However, he defends their use in some situations. Many teens want to purchase items like concert tickets online and can't do so with debit cards, he says. They can download music from services like Apple's iTunes, but must use real credit cards. Valiquette thinks prepaid cards are safer in these situations than real credit cards.

Credit Canada executive director Laurie Campbell says anything promoting credit card-like products to teens is potentially dangerous. "In Canada, we have such a lack of education on the wise use of credit that even though these cards are prepaid, it is assuredly an avenue into the world of regular credit cards once they come of age."

If prepaid credit cards aren't yet ubiquitous, it's because their economics are less compelling for financial institutions. They can't make the big bucks charging high interest rates on unpaid balances so they have to make it up in fees. Some banks don't want to be perceived as gouging consumers on these fees, says Berkeley's Eason. "They want to make sure the cards have a strong value proposition for consumers."

He sees more potential on the corporate side, which is why Berkeley and Scotiabank just announced the first corporate prepaid Visa cards in Canada. These corporate incentive prepaid cards help firms extend their brands, boost employee morale or customer loyalty and may even help them tap new markets. Eason says the prepaid card is less costly to issue than cheques or merchandise and companies are discovering its significant value as a marketing tool by showcasing their name or logo on each card.

*Material reprinted with the express permission of "National Post Company", a CanWest Media Inc. Partnership.