Secured Credit Card vs. Prepaid Card
If your credit history is suffering and you’re looking for a credit card solution, you may consider either secured credit cards or prepaid cards. Both are commonly advertised as solutions for people with bad credit, but which one of the right one for you?
The Difference Between Secured Credit Cards and Prepaid Cards
Both secured credit cards and prepaid cards require you to deposit money before you can use them. Both can be used in the same places that credit cards can be used, e.g. grocery stores, gas pumps, etc. But, that’s where the similarities end.
A secured credit card requires you to make a security deposit against the credit limit before you can be approved for the card. Your security deposit is placed in a savings account or certificate of deposit (CD) and kept there until your card is converted to an unsecured credit until you default on the credit card (hopefully you never do).
Applying for a secured credit card is similar to applying for a regular credit card. Many card issuers still check your credit history, but you're more likely to be approved even if you have a bad credit history. When you use a secured credit card, you're borrowing money, just as with a regular credit card. Purchases made with a secured credit card go against your revolving credit limit and you're required to make regular monthly payments on your credit card balance.
Paying Off Your Balance
When you pay off your credit card balance, your available credit goes up again, just like a regular credit card. The security deposit is required because you're a more risky borrower. Prepaid cards are different. Though they’re often called prepaid credit cards, they’re not credit cards at all. Instead, they're more similar to debit cards, which are tied to a checking account. There’s no credit limit for a prepaid card. You make a deposit onto the card and it goes into an account.
When you swipe the card for purchases, instead of borrowing money from the credit card issuer, the purchase amount is deducted from your card balance. Once you spend up to your deposit, you must redeposit money before you can spend again.
With a prepaid card, you won't have to worry about making monthly payments on time to avoid late penalties and credit damage. There's no credit check for a prepaid card, so you won't be turned down because of a bad credit history.
Which Card Costs More
Fees vary between the secured and prepaid cards. A secured credit card has fees typical of a credit card: application fee, annual fee, finance charge, and late fee. Some of these fees are required. Others can be avoided if you use your credit card responsibly.
Prepaid cards have entirely different fees and, depending on the card you choose, some of them can be high. Activation fees and monthly maintenance fees are charged the first time you open your account and each month the account is open. You may have to pay a fee to reload money onto the card, to withdraw money from an ATM, or to use bill pay. There are some prepaid cards that are completely free. There are no interest charges or late fees with a prepaid card.
Secured Credit Cards vs. Prepaid Cards
If you want to improve your credit score, a secured credit card is the best choice. Make sure you choose a secured credit card that reports to the three major credit bureaus. Some credit card issuers will convert your secured credit card to an unsecured one after 12 to 18 months of timely payments.
A prepaid card is often a choice for people who can’t get a checking account or want to avoid banks. Many employers can direct deposit your paycheck onto a prepaid card and some prepaid cards even let you send a few checks each month or enroll in online bill pay. Prepaid cards are also good for teenagers and students who get an allowance from parents.