The Canadian government has been becoming increasingly concerned about the amount of debt Canadians are racking up for themselves. Because of this, Finance Minister Jim Flaherty along with the Office of the Superintendent for Financial Institutions have placed a number of restrictions on home loans and second mortgages such as HELOCs. Now that those rules are starting to make their intended impact, Mr. Flaherty is targeting another product that only helps consumers dig themselves deeper in debt – prepaid credit cards.
Prepaid credit cards are a very simple concept. Instead of having to apply for a credit card (and have a good credit score in order to do it) and borrowing money that you will pay back in the future, as you would with any other credit card, with prepaid cards you pay upfront. When you get the card, you pay money that will go on the card and become your balance. As you use the card, that balance will deplete; and when it’s all gone you can reload the card with more money.
Sounds simple, and convenient, and it is. That’s why many people (although this is still quite a small percentage of the borrowing market) choose to use them. People who don’t have a good credit score can easily obtain a card and book hotel rooms or car rentals, and buy things online. Parents have also found them useful when they want to start introducing their children to the idea of credit, but in a safe and almost theft-proof way. At first glance, these cards bring all the benefits that traditional credit cards do.
But there are problems. And it’s these problems that Mr. Flaherty has addressed when recently announcing his new rules on these cards.
One of those problems is the expiry dates on these cards. With a traditional credit card, if your card expires you simply apply for, or are sent a new one in the mail. Nothing changes, you still have the same amount of credit (or debt) as you had before, and you can continue using your new card just as you did your old one. With prepaid credit cards however, if that card expires and there’s a balance on it, often that balance disappears along with the card’s “current” status.
This was also once a common problem with electronic gift cards. If you purchased someone a gift card at Walmart for $100 and it expired, that card would simply be rendered useless, you’re out a hundred bucks, and your friend or loved one is out a gift. Mr. Flaherty imposed new rules on these gift cards stating that they could not have an expiry date and now, he’s done the same thing for prepaid credit cards.
“We have done a lot of regulation with respect to debit and credit cards,” said Mr. Flaherty when he announced the changes to prepaid credit cards in late October. “We haven’t done much with respect to prepaid cards. In our view, it was inappropriate for financial institutions to have cards go dormant. For example, people would get cards for their birthdays, not realize that the $200 on the card would expire over a certain period of time. We’re addressing that kind of thing, so that it’ll be more like currency to have a prepaid card, just as it is to walk around with a debit card or a credit card.”
The new rules will also address the exorbitant hidden fees that come with these cards. These fees can greatly eat into the amount a person initially puts on the prepaid cards, making their true value far less than what a person actually pays for them. While there were no announcements that these fees would be federally reduced, institutions that offer prepaid cards will need to also include a disclosure on the packaging, fully explaining the fees; as well as include all fees in any documentation associated with the card contract.
