What is a virtual credit card and how do they work?

What are virtual cards?

Virtual cards are digital versions of physical credit or debit cards used for online and remote transactions. They provide a secure and convenient payment method for digital transactions without exposing your physical card number. Virtual credit cards are great for online shopping, subscription services, and other remote transactions where physical card presence isn't required. You can use virtual credit cards for single-use transactions or multiple transactions, depending on the settings provided by the issuer.

How a virtual credit card works

A virtual credit card works by providing a digital version of your physical credit card, designed specifically for online and remote transactions. You can request a virtual card through your financial provider's website or mobile app. You get a unique card number, expiry date, and CVV code for your virtual card. These details differ from your physical card, but use the same credit account.

Making online purchases

When making an online purchase, you enter the virtual card's details instead of your physical card information. The process for entering card information is the same as with your physical credit card.

Single or multiple uses

Depending on the settings provided by your issuer, you can use the virtual card for a single transaction or multiple transactions with a specific merchant. Some virtual cards are designed to expire after one use, while others can be reused until a preset expiration date.

Benefits of virtual credit cards

Enhanced security features

Virtual credit cards generate a unique card number for each transaction or specific merchant. If the virtual card number is intercepted by a hacker or compromised in a data breach, no one can use it anymore for transactions. This unique number is typically valid for a single transaction or for a limited time, significantly reducing the chances of fraudulent charges on your actual credit card account.

Privacy protection

Using a virtual credit card helps keep your physical credit card number hidden from online retailers and merchants. The added privacy ensures that your primary credit card information remains confidential, reducing the risk of it being stored improperly or exposed to cyber criminals during online transactions.

Control overspending

Virtual credit cards often come with features that allow you to set specific spending limits and expiration dates for each card number you generate. It prevents unauthorized charges beyond your limit, offering greater control over your budget. It also allows you to tailor each virtual card to the particular transaction or merch

Convenience for online shopping

When shopping online, virtual credit cards can be generated instantly for immediate use, and since they are tied to your main account, you can still earn rewards and benefits. Their disposable nature means you don't have to worry about a permanent card number being compromised, making online shopping safer and more convenient.

Simplified subscription management

Virtual credit cards are useful for managing subscriptions and recurring payments. You can create a virtual card specifically for a subscription service, and if you decide to cancel the subscription, you can deactivate the virtual card. This process ensures that there are no further changes without having to go through the hassle of contacting the merchant to cancel the subscription.

Protection against merchant data breaches

If a merchant with whom you’ve used a virtual credit card experiences a data breach, only the virtual card number is exposed. Your primary credit card information remains secure, and you are protected from the widespread implications of such breaches, which could otherwise require you to replace your main credit card and update your payment information with multiple merchants.

Immediate availability

Virtual credit cards can often be generated instantly through your issuer’s website or mobile app. This immediate availability is useful if you need to make an urgent online purchase and do not want to wait for a physical card to arrive in the mail. This feature ensures you can quickly and securely complete transactions whenever necessary.

Ease of deactivation

If you suspect any fraudulent activity or a virtual card number is compromised, you can easily deactivate the virtual credit card without the hassle of cancelling your main credit card. This ease of deactivation means you don’t have to endure the inconvenience of replacing your primary card and updating your payment information with all your merchants, thereby minimizing disruption to your financial activities.

Business applications of a virtual credit card

Expense management

Virtual credit cards allow businesses to issue unique card numbers to employees for specific purposes such as travel, office supplies, or client entertainment. With the ability to set spending limits and expiration dates, companies can better control their budgets and prevent overspending. Detailed tracking and reporting of each transaction provide transparency, making it easier to reconcile expenses and ensure compliance with corporate policies. This granular control helps to reduce misuse of funds and streamline expense reports.

Vendor payments

Using virtual cards for vendor payments provides additional security and convenience. Businesses can generate individual virtual card numbers for each vendor, which limits the risk of fraud and ensures that payments are made only to authorized recipients. This approach simplifies the accounts payable process by allowing vendors to easily track and categorize expenses. Additionally, virtual cards can expedite payments, improve cash flow management, and potentially secure early payment discounts from suppliers.

Subscription management

Businesses often use numerous subscription-based services for software, cloud storage, marketing tools, and other operational needs. Virtual credit cards allow companies to assign a unique virtual card to each subscription, simplifying the management of recurring payments. If a subscription is no longer needed, the associated virtual card can be cancelled quickly, preventing further charges. This method ensures that subscriptions are continuously monitored and managed, reducing the risk of overlooked or unnecessary expenditures.

Improved security

One of the primary benefits of virtual credit cards is enhanced security. Businesses significantly reduce the risk of fraudulent charges by generating unique card numbers for each transaction or vendor. If a virtual card number is compromised, it can be easily deactivated without impacting the main corporate account. This isolation of transactions minimizes the potential financial impact of data breaches and ensures that sensitive credit card information remains protected.

Streamlined accounting

Virtual credit cards provide detailed transaction data, allowing businesses to easily trace each expense to a specific department, project, or employee. This level of detail simplifies the accounting process, as costs can be accurately allocated and monitored. Automated integration with accounting software further enhances efficiency, reducing manual data entry and minimizing errors. This streamlined approach helps maintain accurate financial records and supports effective financial planning and analysis.

Control over employee spending

By issuing virtual credit cards with predefined spending limits and merchant restrictions, businesses can ensure that employees spend within the set parameters and only on authorized purchases. This control mechanism reduces the risk of overspending and unauthorized transactions, helping to maintain budget discipline. Furthermore, detailed reports on employee spending can be generated, providing insights into spending patterns and identifying areas for cost optimization.

Automation and integration

Many virtual credit card providers offer seamless integration with accounting and expense management software. This integration allows for automating transaction recording, reconciliation, and reporting processes, significantly reducing the administrative burden on finance teams. Automated workflows ensure that recurring payments are made on time, reducing the risk of late fees and maintaining good relationships with vendors. This automation also enhances accuracy and compliance with financial policies.

Project-based budgeting

For businesses that operate on a project basis, virtual credit cards can allocate specific budgets to each project. It enables precise tracking of project-related expenses, ensuring that costs remain within the allocated budget. Detailed transaction data helps project managers with real-time transaction monitoring, make informed financial decisions, and adjust budgets as needed. This approach supports effective project management and financial oversight, contributing to the overall success of projects.

Global transactions

Virtual credit cards facilitate international transactions, making it easier for businesses to manage payments to global vendors and service providers. They offer the convenience of handling different currencies and can help reduce the risk of fraud associated with cross-border transactions. For companies with remote teams or those engaged in international trade, VCCs provide a secure and efficient payment solution, ensuring that global operations run smoothly.

Fraud prevention and compliance

Virtual credit cards enhance fraud prevention by allowing businesses to set transaction controls, such as limits on transaction amounts, expiration dates, and merchant categories. These controls reduce the risk of unauthorized transactions and help ensure that spending aligns with company policies. Additionally, virtual cards support compliance with internal financial policies and external regulatory requirements by providing detailed transaction records and audit trails. This capability helps businesses maintain financial integrity and meet compliance standards.

Virtual credit card features

Virtual credit cards come with various features designed to enhance safety, control, and convenience for users. Here’s a detailed look at the key features of virtual credit cards:

Unique card numbers

Virtual cards generate unique card numbers for each transaction or merchant. It reduces the risk of fraud since the number is only valid for a specific purpose or period. Unlike traditional credit cards, virtual card numbers can be set to expire after one use or after a specified period, adding an extra layer of security.

Customizable spending limits

The purpose of the credit limit is to set the maximum amount you can spend on your credit card. It prevents you from overspending and accumulating too much debt and limits the risk the lenders have. Users can set specific spending limits on virtual cards, ensuring that only a predetermined amount can be charged. This is useful for budgeting and preventing overspending. You can limit the number of transactions or the total amount spent, providing further control over how the card is used.

Expiration dates

Virtual cards often allow users to set expiration dates, making them valid for as long or as short as needed. It helps in managing recurring payments or one-time purchases. Setting short expiration dates minimizes the risk of fraud, as the card details become invalid after a certain period.

Merchant-specific use

Virtual cards can be restricted to specific merchants or types of transactions. This feature ensures that the card can only be used with authorized vendors, reducing the risk of unauthorized purchases. Depending on the need, virtual cards can be designed for single use, ideal for one-time purchases, or multi-use with a particular merchant, and are useful for recurring transactions.

Detailed transaction tracking

Virtual cards provide detailed transaction records, making tracking and managing expenses easier. This is particularly beneficial for budgeting and financial planning. Transactions can be categorized based on the virtual card used, aiding in more precise expense tracking and reporting.

Fraud prevention

Virtual cards often include features to limit the types of transactions that can be performed, adding another layer of security against unauthorized use. If suspicious activity is detected, the virtual card can be quickly deactivated without affecting other payment methods or the main account.

Integration with financial tools

Many virtual card providers offer integration with accounting and expense management tools, streamlining financial processes and reducing administrative burdens. Automatic generation of transaction reports aids in financial analysis and compliance with internal and external auditing requirements.

Are there fees for virtual cards?

The fees associated with virtual credit cards can vary depending on the issuer and the specific features of the card.

Issuance fees

Many financial providers offer virtual cards at no additional cost as part of their credit card services. Users can generate virtual cards for free via their online banking platforms or mobile apps. Some providers may charge a one-time fee for generating a virtual card. This fee can vary based on the issuer and the specific service offered.

Monthly or annual fees

Certain virtual card services may have monthly or annual subscription fees, especially if they offer advanced features such as detailed expense tracking, integration with financial software, or additional security options. In some cases, virtual card features are bundled with premium accounts or credit cards that already have higher annual fees.

Transaction fees

Typically, there are no additional transaction fees for using virtual cards for domestic purchases, as they operate like standard credit cards. Fees may apply for international transactions, including foreign transactions and currency conversion fees. These fees are usually similar to those associated with traditional credit cards.

Service fees

Some providers may charge for specific advanced features, such as detailed reporting, extended fraud protection, or integration with third-party financial management tools. There might be a fee associated with generating a new virtual card number if a virtual card is compromised or needs to be replaced frequently.

Administrative fees

Some services may include administrative fees for account management, particularly if multiple virtual cards are issued and managed for business purposes. Setting up and managing specific spending limits, merchant restrictions, or expiration dates might incur additional fees depending on the issuer’s policies.

Usage fees

For businesses or individuals who generate a large number of virtual cards, there may be fees based on the volume of cards issued or transactions processed. Some issuers may offer optional features, such as enhanced security measures, at an additional cost.

Virtual card trends to look out for

Virtual cards are becoming increasingly popular due to their convenience and security features. There are many trends to look out for for virtual cards as the world becomes more digitalized. Businesses are increasingly adopting virtual cards to streamline expense management, providing employees with controlled spending options and reducing fraud risk. Virtual cards integrating with expense management and accounting software are becoming more common, allowing more efficient business-to-business payment and reconciliation processes.

Virtual cards are increasingly being integrated with digital wallets like Apple Pay, Google Pay, and Samsung Pay, providing a seamless payment experience for users. This integration allows virtual cards to be used across various devices and platforms, enhancing their versatility and convenience. Users can enjoy the benefits of virtual cards without the need to carry a physical card, making digital payments more accessible and user-friendly.

Consumers are getting more control over their virtual cards, including customizable spending limits, expiration dates, and merchant-specific restrictions. This level of personalization allows users to tailor their virtual cards to meet their specific needs and preferences. Enhanced user experience is also a priority, with user-friendly interfaces and intuitive design making it easier for consumers to manage and use their virtual cards. These customizable features contribute to a more flexible and user-centric financial tool.

As virtual cards eliminate the need for physical card production, they contribute to reducing plastic waste and promoting environmentally friendly financial practices. More financial institutions are adopting virtual cards as part of their sustainability initiatives, promoting eco-friendly alternatives to traditional banking products. This shift not only helps in reducing environmental impact but also aligns with the growing consumer demand for sustainable and responsible financial solutions.

Virtual card providers are expanding their services to support international transactions, making it easier for users to make cross-border payments securely. Support for multiple currencies is becoming more common, enabling users to make payments in different currencies without incurring high conversion fees. This global reach makes virtual cards a practical solution for international travellers and businesses that operate across borders. The expanding global reach of virtual cards underscores their growing importance in the global financial ecosystem.

Lastly, some virtual card providers are beginning to offer the ability to link virtual cards with cryptocurrency wallets, enabling users to make purchases with cryptocurrencies. Blockchain technology has also been explored to enhance the security and transparency of virtual card transactions. This integration opens up new possibilities for users who wish to leverage digital currencies for their transactions while enjoying the benefits of virtual cards. It represents a significant step towards the future of digital finance.

Where can you get a virtual credit card?

Virtual credit cards can be obtained from various financial institutions and digital payment platforms. Each source offers unique features and benefits, so it's essential to choose the one that best meets your needs for security, convenience, and financial management.

Here are some of the most common sources where you can get a virtual credit card:

• KOHO virtual credit cards: You can open a KOHO account today with no credit checks and earn up to 6% cash back on your spending. Sign up today and experience how KOHO can make a difference in your life.

• Banks and credit unions: Many traditional banks and credit unions offer virtual credit cards to their customers. These institutions typically provide virtual card services through their online banking platforms or mobile apps.

• Online payment services: Digital payment services and financial technology companies are major providers of virtual credit cards.

• Credit card issuers: Major credit card issuers often provide virtual credit card numbers to their cardholders. These issuers typically offer virtual card services as part of their online account management tools.

• Mobile wallets and payment apps: Mobile wallets and payment apps sometimes offer virtual credit cards as part of their services, making it convenient for users to make secure online payments.

• Virtual card providers: Specialized virtual credit card providers focus exclusively on offering virtual card solutions for businesses and individuals. These companies often provide advanced features, such as detailed expense tracking and integration with financial management tools.

• Corporate card programs: Businesses often use virtual credit cards as part of their corporate card programs to manage employee expenses and subscriptions.

What credit score do you need for a virtual credit card?

The average credit score in Canada is around 680, which is typically a good credit score and may qualify you for a range of credit cards. The credit score required to obtain a virtual credit card varies depending on the issuer and the type of card you are applying for. Most major banks and credit card issuers often provide virtual card numbers to existing cardholders. If you have a good to excellent credit score, you are more likely to be approved for a traditional credit card, which allows you to use virtual card features.

Some issuers offer credit cards to individuals with fair credit. These cards may have higher interest rates and fewer benefits but can still provide virtual credit card numbers. Services like PayPal may not require a traditional credit check to issue virtual cards, especially if the virtual card is linked to an existing bank account or payment service. These services can be accessible to individuals with a range of credit scores.

If a virtual card from a mobile wallet, like Apple Pay or Google Pay, is linked to an existing credit card, the credit score requirement will depend on the linked card. Users must meet the credit score requirements of their original credit card issuer.

The credit score requirements for corporate virtual cards depend on the business's creditworthiness rather than the individual's credit score. Companies often need to demonstrate strong financial health and credit history.

What are the interest rates on virtual credit cards?

Interest rates in Canada are influenced by the Bank of Canada, which controls the policy interest rate. Changes in the policy rate impact the way financial institutions apply interest on credit, like loans and credit cards. A lower policy rate typically equates to a lower prime rate.

The interest rates on virtual credit cards are generally aligned with those of the traditional credit cards they are linked to. For major credit card issuers, rates typically range from 15% to 25% APR, depending on the card type and the user's creditworthiness. Subprime cards tend to have higher rates, from 20% to 30% APR.

Fintech companies and corporate virtual cards may have different structures, with some functioning like charge cards without traditional interest rates but with various fees. Review the terms and conditions of the specific virtual card provider to understand the applicable interest rates and fees.

How to build your credit with a virtual credit card

Building credit with a virtual credit card follows similar principles to using a traditional credit card. The first step is to choose the right card. Opt for a virtual credit card from a reputable issuer that reports to the major credit bureaus, Experian, Equifax, and TransUnion.

Consider credit-building cards such as secured credit cards, student credit cards, or entry-level unsecured cards designed for those with limited credit history. It's essential to ensure that the virtual card usage and payment history are reported to the credit bureaus, as some fintech companies and virtual card providers may not report this information, which won't help build credit.

Once you have the right card, use it responsibly. Regular use of your virtual card for small, manageable purchases shows active and responsible credit usage. Your credit limit affects your credit score as it impacts your credit utilization, and there are potential hard inquiries if you request to increase the limit. Aim to keep your credit utilization ratio low, ideally below 30% of your credit limit, as high utilization or going over your credit limit can negatively impact your credit score.

Making timely payments is crucial—always pay at least the minimum payment by the due date. If possible, pay off your balance in full each month to avoid interest charges and demonstrate strong financial management. Monitoring your credit is another important step. Regularly check your credit reports to ensure all information is accurate and up to date. You can get a free credit score report from each of the major bureaus once a year or from your credit card provider.

Keeping accounts open for a long period can positively impact your credit score by increasing the average age of your credit accounts. Maintain occasional activity on older accounts to prevent them from being closed due to inactivity. Utilize card features such as payment alerts and reminders to ensure you never miss a payment, and consider setting up auto-pay for at least the minimum payment to avoid missed payments.

Sign up for a KOHO virtual credit card today

Are you looking for a virtual credit card to conveniently make virtual card payments, whether you're shopping at a store or online? The KOHO virtual credit card lets you pay without a physical credit card while earning cash back on each dollar spent. You can instantly unlock your virtual credit card through the app and have peace of mind with top security protection against fraud and cyber threats. The virtual credit card comes in handy when you travel or shop online.

If you're worried about needing extra funds in emergencies, you can sign up for Cover, our overdraft protection coverage. It gives you up to $250 in zero-interest cash advance when you have unexpected expenses that throw you off budget. We make it easy for you to build credit with KOHO and qualify for a range of credit products.

Besides credit products, we also have different plans for spending and saving to help you reach various financial goals. For example, our high-interest savings account lets you earn interest at a higher rate than a traditional one on every dollar deposited.

If you're a business looking for enterprise solutions to help fund your operations and facilitate better financial management, look no further than our KOHO for business accounts.