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Secured credit cards and prepaid cards are variations of a standard credit card, each with its benefits and limitations. This article explores the main features of each type of card and compares them in terms of functions, limitations, and differences.
If you’re not sure which card works best for you, read on to see our recommendations.
How Secured Credit Cards Work
A secured credit card is similar to a traditional credit card. You can use it to make purchases, pay bills, and build your credit history. However, a secured credit card is more limited than a standard credit card because it requires a cash deposit as collateral against your line of credit.
The main features of a secured credit card include:
- Collateral: To open a secured credit card account, you need to deposit at least $200 to act as collateral.
- Limited credit: Your deposit acts as your credit limit, allowing you to essentially borrow against your own money to build your credit score.
- Lower interest rates: Secured credit cards typically have lower interest than traditional credit cards because they have the deposit to act as a safety net for the issuer.
Using a secured credit card is similar to using a traditional credit card. You can make purchases, pay bills, and build your credit history. However, you are still using credit borrowed from your card issuer rather than your own funds. The deposit merely acts as security for your bank or credit union.
As with all credit cards, you still need to make monthly payments and pay your bills before the due date.
The Benefits Of Using A Secured Credit Card
- Credit building: If you have a limited or damaged credit history, a secured credit card can help you build or rebuild your credit.
- Increased credit limit: As you use your secured credit card responsibly and make regular payments, some credit card issuers may offer to increase your credit limit. This can provide you with more purchasing power and flexibility.
- Potential for an unsecured credit card: With responsible use of a secured credit card, you can later upgrade to an unsecured credit card. This means you can get your deposit back and access a higher credit limit without the need for collateral.
Overall, secured credit cards are aimed at individuals with a low or non-existent credit score and limited credit history. This type of card allows individuals to start building their credit through consistent payments, low credit utilization, and on-time bill payments.
How Prepaid Cards Work
While secured credit cards are linked to your bank account, prepaid cards are not. They are similar to gift cards, in that you can only spend what is loaded onto the card. The main features are as follows:
- Requires loaded funds: When you get a prepaid card, you need to load funds onto it. These funds don’t go to your bank account, but instead stay linked to the card. Unlike a credit card, you cannot exceed the limit, and your spending stays confined to how much money is on the card.
- Available in various forms: You can get a prepaid card as a physical card or on your phone via a digital wallet. You can load funds onto your card online, through direct deposit, or with specific retailers.
- Can be used like a normal card: You can withdraw money from the ATM, make payments, and online purchases using a prepaid card.
It’s important to note that prepaid cards are not credit cards and do not help you build or improve your credit history. They are simply a means of accessing your own funds.
The Benefits Of Using A Prepaid Card
- Convenience: Prepaid cards allow you to make purchases without needing to carry cash or write cheques. You can use them for online shopping, in-store purchases, and bill payments.
- Budgeting tool: Prepaid cards can be an effective budgeting tool. You can load a specific amount onto the card, and once that amount is spent, you cannot make any more purchases until you reload the card.
- Security: Prepaid cards provide an added layer of security compared to cash. If your card is lost or stolen, you can report it to the card issuer, and they can freeze or replace the card. This protects your funds from unauthorized use.
Using a prepaid card can be a convenient and secure way to manage your spending. It’s a suitable option for individuals who want to avoid carrying cash or prefer not to have a traditional bank account.
The Difference Between Secured Credit Cards And Prepaid Cards
While both secured credit cards and prepaid cards offer financial flexibility, there are several key differences between the two:
SECURED VS PREPAID CARD COMPARISON TABLE
| Feature | Secured Credit Card | Prepaid Card |
|---|---|---|
| Does it build credit? | Yes | No |
| Linked to a bank account? | Yes | No |
| Collateral requirements | A secured credit card requires collateral to function. | A prepaid card does not work on credit and does not require collateral. It’s more like a gift card. |
| Credit limit | The credit limit on a secured credit card is typically equal to the deposit amount. | There is no “credit limit” on a prepaid card, only a limit based on the funds loaded onto the card. |
| Payment responsibility | With a secured credit card, you are borrowing money from the credit card issuer and must make regular payments. | With a prepaid card, you are using your own funds, so there are no monthly payments to worry about. |
| Is card activity reported to credit bureaus? | Yes | No |
| Who is it best for? | People trying to build up their credit from scratch. | People who don’t want to carry cash or who might be travelling. |
In short, secured credit cards require a deposit payment and work on credit, while prepaid cards are like gift cards that allow you to load and spend your own money. Secured credit cards can help you build credit, while prepaid cards are just a convenient way to store and use your money.
Factors To Consider When Choosing Between A Secured Credit Card And A Prepaid Card
Secured credit cards and prepaid cards are two very different card options. If you find yourself choosing between the two, remember to consider the following:
- Credit goals: If you’re looking to build or improve your credit, a secured credit card may be the best option. If you don’t need to build credit, a prepaid card can offer convenience and flexibility.
- Deposit amount: Secured credit cards require a cash deposit, while prepaid cards require funds to be functional. In the case of a prepaid card, however, you get to use your deposited amount directly, while a secured credit card holds onto this deposit until you close the account.
- Fees: Compare the fees associated with both types of cards. Some secured credit cards may have annual fees, while prepaid cards may have activation fees or monthly maintenance fees.
- Credit check: If you have a limited or damaged credit history, you may find it easier to qualify for a prepaid card since they typically do not require a credit check.
- Spending habits: Consider how you plan to use the card. If you want to make purchases beyond the amount you have loaded, a secured credit card may be a better option. If you prefer to stick to a budget and only spend what you have, a prepaid card can help you achieve that.
Remember to weigh your options and do your research before deciding on the best option for you.
Final Thoughts
Secured credit cards and prepaid cards offer different benefits and features. A secured credit card can help you build or rebuild your credit history, while a prepaid card offers convenience and flexibility without impacting your credit. Consider your financial goals, spending habits, and credit needs when deciding which card is right for you.
