Secured Credit Card vs. Prepaid Card – Which to Choose

Are you new to finance and want to find out what to start building your credit history with? Or maybe you’ve had hard times under your belt and now have to rebuild your credit score bit by bit? Then, probably you’ve already stumbled on some information about secured credit cards and prepaid cards.

However, do the questions of what the difference between them is and which one you’d better choose remain open for you? Let’s investigate this issue step by step.

What is a secured credit card?

Above all things, you should know that a secured card is a type of credit cards. What does it mean?

Firstly, when you use a regular credit card, you borrow money from a bank. The same concerns secured credit cards. Purchases reduce your credit limit, and you must make monthly payments on a regular basis.

Secondly, issuers monthly report your account activity to three major US credit bureaus – Experian, Equifax and TransUnion. Thanks to this you have a chance to build or rebuild a credit history and get an unsecured credit card in the future.

Nevertheless, there is one important feature that distinguishes secured credit cards from unsecured ones. As the name suggests, you must pay a security deposit beforehand. It is typically not less than $200-$300 and is to become the credit limit you will be allowed to use. So, for example, if you deposit $1,000, you will have a $1,000 credit limit to spend then. This money becomes unavailable to the borrower after it has been paid and is supposed to protect the issuer in case of your failure to pay. Don’t worry, the deposit is refundable and will be returned to you if you decide to cancel your card provided you’ve paid off your balance in full and the deposit hasn’t been used. Thereby, as with unsecured credit cards, you borrow money from a bank.

The good news about secured credit cards is that no matter whether you have bad credit or don’t have a credit history at all, you can apply for almost any secured card and more likely be approved. Still, do not forget to look through all the conditions required by an issuer as they may include, for example, having a bank account or something else.

Secured Credit Card vs. Prepaid Card – Similarities

What about prepaid cards? Are they really so similar to secured cards?

Firstly, both types of cards that we are considering require some amount of money paid upfront. Secondly, both can be used to pay for purchases in different places like grocery stores, gas stations, restaurants, etc. and even for shopping online. In other words, you can pay as with secured cards as with prepaid cards in all the same places where general credit cards are accepted. Thirdly, issuers of both card types may offer some rewards, e.g. cash back on purchases. After that all the similarities end.

Secured Credit Card vs. Prepaid Card – Differences

Even if at first blush secured cards seem to be the same as prepaid ones, they turn out to be completely different in fact.

As it was mentioned, secured cards are credit cards and are more like regular credit cards. On the contrary, prepaid cards, despite the fact they are often called prepaid credit cards, are debit cards.

You have already found out that both card types need you to load them with money first. However, prepaid debit cards unlike secured credit cards presuppose you use your own money for purchases and do not borrow money from a bank. You can add any amount on the card, then this money is used to pay for your purchases. As soon as the money runs out, you can no longer make any purchases until you put money on the card again.

Next, the prepaid cards won’t help you build or rebuild your credit history as they don’t report to any credit bureaus as secured cards do. Note that this advantage of secured cards may easily turn into a disadvantage in case you are going to miss payments. The reports will also include bad information. So, be careful.

Fees charged for secured credit cards and prepaid cards are also different. Secured cards have fees similar to unsecured ones: annual fee, APR on purchases, cash advance and balance transfer and late payment fee. Some of these fees are obligatory, others can be avoided by means of responsible use of the card. But the main thing is that you should monitor the monthly payments, so as not to be up to your ears in debt.

Prepaid cards have completely different fees. You may be required to pay activation fee, monthly fee and paper statement fee. Moreover, sometimes there is a commission for putting money on a card and its withdrawing from an ATM and for paying bills. However, it’s still possible to find prepaid cards without any fees.

Another difference and even more important advantage of secured cards is that after some period of on-time payments (typically 12-18 months), card issuers may let you switch your card to an unsecured one. But remember that some issuers may do it without your request while others will bump you up only if you ask to. Such an upgrade can never happen to a prepaid card. That is one more reason to always pay at the proper time.

What to Choose?

Now as you know the main differences and similarities of secured credit cards and prepaid cards, it’s time to decide which one is better for you. The whole point is that it all depends on your needs.

On the one hand, if you have a long-range aim to build credit, a secured credit card is definitely what you should consider. Using this type of card, you can be pretty sure that your account activity is regularly sent to credit bureaus that favors the building of your credit history. Prepaid card will not affect your credit history or credit score at all.

On the other hand, if you are not going to make big purchases like a car or a house in the future, want to avoid credits and just to use your own money, a prepaid card is a better choice than a secured card at that rate. Prepaid cards are also more suitable for teens and students, who only receive money from their parents so far.