If you have bad credit
, you’ve likely gotten mail offers and seen online advertisements for secured credit cards
and prepaid debit cards
Before you jump on an offer, though, it’s important to understand the difference between a secured card and a prepaid card
, and which option you need right now.
To help you understand, we’ll cover the major features of each and how they can help you get your credit or finances back on track
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The difference between a secured card and a prepaid card
These cards are similar only in that you can use them to make purchases. Beyond that, they couldn’t be more different.
Here’s a breakdown of each to give you an idea of what you’re being offered.
Secured credit cards
“Obtaining a secured card requires a security deposit or collateral, generally the same amount of your credit limit,” says Katie Ross, education and development manager at American Consumer Credit Counseling
After that, it functions similarly to a traditional credit card
. You can make monthly payments to pay off the purchases you’ve made with the card throughout the month.
You’ll also undergo a credit check
when you first apply for the card, which can ding your credit score
. This does not mean that you’re replenishing the deposit every time you make a payment.
That cash is strictly used as collateral in case you default on your payments.
A secured credit card is a great way to build credit
because it allows you to make monthly payments on a revolving credit line. In fact, you can essentially build credit for free if you pay off your balance on time and in full each month.
That’s not an option with credit-builder loans
and other types of credit.
You can typically make payments by connecting your bank account
or by sending a check or money order. If you don’t pay off your balance in full, however, the credit card issuer will charge you interest, and you can generally expect the interest rate to be higher than 20%.
Also, some secured credit cards charge an annual fee
, typically $25 to $50, although many of the best secured credit cards
don’t charge annual fees.
Other potential fees include:
- Cash advance fees
- Foreign transaction fees
- Over-limit fees
- Late payment fees
- Returned payment fees
Prepaid debit cards
A prepaid card is also sometimes referred to as a reloadable debit card. It’s not a credit card, and there’s no credit relationship with the card issuer.
You can use the card the same way you use a debit card, and can only use what you load onto the card account. In other words, it functions more like a debit card
and a checking account.
Depending on the card, you can load money onto your prepaid debit card in one or more of the following ways:
- Bank transfer
- Cash reload at participating retailers
- PayPal transfer
- Direct deposit
- Mobile check deposit
So, if you load $100 onto your account, you can spend that much before your account hits $0 and you have to load more money. You don’t have to put up a deposit to get the account, and you don’t make monthly payments like you would with a credit card.
“Debit cards do not help users build credit,” says Ross. “When you use a debit card, you are not borrowing and repaying the money. It’s just taking money out of your account. So, while a debit card can show your budgeting skills, they don’t prove that you are a responsible borrower.”
This also means there’s no credit check when you apply, and you won’t ever get charged interest
, although some prepaid cards do charge a fee if you overdraw your account.
That said, “many debit cards can be set up so that any transaction that would put your account into a negative balance will be denied,” says Ross.
Other fees you may be charged with a prepaid card include:
- Monthly maintenance fees
- Cash reload fees
- ATM withdrawal fees
- Foreign transaction fees
- Money order or cashier’s check fees
Which payment method is best for you?
Now that you know the difference between secured cards and prepaid cards think about your situation to determine which card is best for you.
Here are a couple of scenarios in which one card might be better than the other.
You’re trying to rebuild your credit
Having good credit is important if you want to borrow at some point in the future. What’s more, having bad credit
can hurt your chances of getting an apartment, a job, or cheap car insurance
If your main goal is to establish a positive credit history, a secured credit card is the only option between the two that can help.
Check out the Discover it Secured
and the OpenSky Secured Visa Credit Card
, and compare them to other credit cards
to find the one that fits you best.
Just be sure to use the card responsibly by living on a budget, and pay off your balance on time and in full every month.
You’re trying to improve your spending habits
If you’ve dealt with credit card debt in the past and want to avoid playing with fire, a prepaid debit card might be a better choice for you.
A prepaid card can help you improve your spending habits
- Helping you track your expenses
- Limiting you to a certain amount spent each week or month (based on what you load onto the card)
- Helping you automate your savings
Also, the lack of interest can help you avoid getting sucked into the vicious cycle of debt again.
The bottom line
The difference between secured cards
and prepaid cards
is focused in their differing purposes. One isn’t necessarily better than the other in a vacuum.
But if you have a specific purpose in mind, one may clearly be a better choice than the other. Do your research and consider your needs, then choose a card based on what you find.
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.
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