There’s no such thing as a prepaid credit card that builds credit. In fact, the term “prepaid credit card” itself is a misnomer. There are two different products it could be describing: a secured credit card or a prepaid debit card.
Read on to learn about the differences, what each can and can’t do, and what you should look for in each.
The differences between a secured credit card and a prepaid debit card
A secured credit card and prepaid debit card are two entirely different products, each with different purposes. Here’s a quick summary of the
Which is better for you?
If you need to improve your credit score, a secured credit card that builds credit is likely your best bet. And while it’s possible that you could go into debt and pay interest, it’s not necessary. As long as you use the card responsibly and pay off your balance in full each month, you’ll never have to pay interest.
If, however, you don’t need to build credit or you want to avoid the temptation to overspend, you might be better off with a prepaid debit card.
“When you use a debit card, you are not borrowing and repaying the money – it’s just taking money out of your account,” says Katie Ross, education and development manager for American Consumer Credit Counseling. “So, while a debit card can show your budgeting skills, they don’t prove that you are a responsible borrower.”
Before you start applying, consider all of your options, your needs, and your preferences.
The best secured credit cards and prepaid debit cards
Whether you’re looking for a secured credit card that builds credit or a prepaid debit card, here are some of the top ones you should consider.
Secured credit cards
- Doesn’t require a credit check or checking account
- Charges a reasonable interest rate
- Your credit limit, which is equal to your security deposit, can range from $200 to $3,000
- Charges a $35 annual fee
- Charges an ultra-low interest rate
- Your initial credit limit, which is equal to your security deposit, can range from $200 to $1,000
- With additional deposits, you can increase your deposit to up to $5,000
- Charges a $48 annual fee
- Offers rewards on everyday purchases
- Your credit limit, which is equal to your security deposit, can range from $200 to $2,500
- You may get your deposit back before you close the account
- Charges no annual fee
Prepaid debit cards
- Offers cash back on every purchase
- Charges a monthly maintenance fee of $5.95
- Offers extra perks like purchase protection and Amex Offers
- You can add money through direct deposit, bank account transfers, and check deposits for free
- Gives you special offers when you shop online
- Offers a savings account with an APY up to 5%
- Charges a monthly maintenance fee of $4.95
- You can add money to your card for free using direct deposit or transfers from your PayPal account
- Offers a savings account with an APY up to 6%
- Charges a monthly maintenance fee of $3
- You can add money to your card for free using direct deposit, bank account transfers, and transfers from your PayPal account
The bottom line
If you’re looking for a prepaid credit card that builds credit, you might end up disappointed. There’s no hybrid version of a secured credit card and a prepaid debit card, but you can get one of each.
For example, you could use a secured credit card sparingly to build credit while using a prepaid debit card for most of your budgeting. Or you can just get one or the other.
There’s no right choice here, but it’s important that you take the time to research each and consider which one is better for you. And make sure you can afford it, says Ross.
“Obtaining a secured card requires collateral, generally the same amount of your credit limit,” she says. “If you don’t have the money upfront, it can hurt your chances of getting a card.”
As you take the time, it’ll be easier to pick the right one. And if your goals or needs change down the road, you can always change cards.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.