Secured Credit Card vs Prepaid Card: What’s the Difference?
If you’ve never owned a credit card or you’re looking to rebuild your credit, you might be looking at some other options besides traditional credit cards. As you may (or may not) know, if you have no credit or bad credit, it can be hard to qualify for a line of credit. Secured credit cards and prepaid cards are fantastic options for those who are starting small and looking to build their way up to a larger commitment. Before you decide to sign up, it’s a good idea to understand the ins and outs of secured credit cards compared to prepaid cards. Each of these cards has many benefits, but before you apply, you’ll want to know exactly how it could help or harm you in the long run.
Table of Contents
What is It?
Secured Credit Card:
A secured credit card is a credit card that offers much less risk for the bank and the user. A deposit is required in order to get started. In addition, your credit will be checked to make sure that you qualify. However, because a deposit is required, unlike a regular credit card, it is much easier to be approved for a secured credit card.
If you qualify, a deposit is put in place as insurance for the card company. For example, a bank may require a $500 deposit, which means you’ll likely have $500 in credit to spend. The deposit is kept as collateral. If you don’t make payments on your card, the bank will use your deposit to pay off the balance. For the bank, there is virtually no risk involved in this line of credit, but for you it works exactly the same as a traditional credit card does.
A secured credit card is often used by those who have little to no credit history, or bad credit. Individuals in either of these situations may not be approved for a traditional credit card. If this is the case you can try a secured credit card for a period of time, improve your credit, and when you decide to cancel you’ll get your entire deposit back — that’s a win-win.
On the other hand, prepaid cards are not credit cards. Prepaid cards are essentially debit cards that are loaded with money that can then be spent. You do not have to undergo a credit check beforehand and your spending habits will not positively or negatively affect your credit. As such, these cards do not need to be purchased at a bank and they can usually be purchased at any variety of stores.
These cards are actually gaining a bit of popularity when used in conjunction with a standard, bank-issued debit card or even simply on their own. So, here’s how it breaks down: when a customer opens a checking account and is issued a debit card through a traditional bank or credit union, there are common stipulations that are attached to the account. For example, the type of card that the bank issues may not be accepted everywhere, there may be hefty fees associated with certain withdrawals and purchases, and banks often only allow funds to be withdrawn from ATMs associated with the bank or credit union. Prepaid cards often offer smaller fees, free ATM withdrawals, and the type of card is often widely accepted.
How Do I Get One?
Secured Credit Card:
Secured credit cards are offered through banks, credit unions, and directly through credit card companies. No matter where you apply for a card, the card will affect you in the same way. Just because you choose to go directly through a card company instead of a bank, doesn’t mean that your credit will be affected in a different way. Your credit will still reflect the way you spend the credit and pay it off.
The only true positive of being approved for a secured credit card through your bank instead of another lender, is the relationship between you and your bank. If you’re thinking about taking out a loan for a car, home, or other larger purchase directly through your bank, it might be wise to use that same bank for your credit cards. Now, any bank will be able to pull your credit report and see the same information, but if you use the same bank for credit cards, checking accounts, and future loans, they may be more inclined to work with your needs based on your loyalty, relationship status, and longevity. However, this is not going to apply to all scenarios, so check with your bank and tell them about your plans for the future. Their options may surprise you.
As we stated earlier, a prepaid card can be purchased at just about any store near you. Essentially, all you have to do is purchase the card, activate it online or over the phone, load the card with money, and spend whenever you’re ready. Remember though, that you’ll need to keep track of the funds on the card. If you’re trying to purchase a ten dollar item and you’ve only got five dollars left on the card, your card might come up as “declined,” which doesn’t mean you don’t have any money, but you need to have enough money on the card to cover the total cost of your purchase. While some banks will allow you to overdraw from your checking or debit account and will charge you a nasty fee later, this is not the case with a prepaid card. You can only spend the exact amount that is on the card.
How Will It Affect My Credit?
Secured Credit Card:
A secured line of credit can be extremely beneficial to those who are suffering from bad credit or have no credit. Once you sign up for the card and start making purchases, you are of course expected to pay back that credit. When you make your payments on time, your actions will be reflected on your credit history and will influence your overall credit score. You’ll need to keep in mind that many things influence your credit history and credit mistakes stay on your report for at least seven years. Simply making payments on time for a couple of months might not completely turn your credit score around depending on the weight of your past mistakes.
There really isn’t a way for a prepaid card to negatively affect you. You load the card with your own money and spend it anyway that you like. There are no payments and often there are very few or small fees, since it is your own money. In fact, there are more options opening up everyday with prepaid cards.
Often times, it is easier to transfer money from one person to another using a prepaid card. The cards are often completely insured, which means you will not be held liable if your card is stolen and you’ll get all of your money back. Prepaid cards are also a great way to manage your money and set a clear budget for yourself if you find yourself overspending quite often. What’s more, some prepaid cards offer direct deposit with zero fees and some companies even get the funds to you faster than a bank would.
All in all, prepaid cards are almost completely positive, although the benefits won’t extend to credit building or repair. The only downside is said to be hidden fees. Make sure that you research the company and card program thoroughly before signing up.
How Long Should I Use It?
Secured Credit Card:
Making good financial decisions, like making your credit card payments on time, will improve your credit score. In addition, if you carry these good habits over into other financial areas of your life, you’ll be in an even better spot. Making sure that you pay loans on time is a huge part of improving your credit score. Chipping away at debt will also make a large impact on your overall score. With that being said, paying your secured credit card bills on time is a wonderful start towards improving your credit score.
How long you decide to use your credit card completely depends on your current credit situation. If you have zero credit, you might be able to see a large enough improvement in as little as six months if you make your payments on time. However, you should know when and how often to check your credit or apply for new loans before you make any decisions about cancelling your card.
If you’re suffering from bad credit, you might need to hold onto the credit card for a bit longer. Bad credit often stems from many weighty mistakes that can take years to drop off of your credit history. In order to override these mistakes, you’ll need to make a complete overhaul to your credit. Simply making your credit card payments on time will help, but it won’t do much if all of your other payments are late or sent to collections for nonpayment. Secured credit cards should be used to supplement good credit choices. Sometimes, cleaning up your credit may take a year or two of solid work in multiple areas. Since this could a longer journey than someone with no credit, take advantage of your free yearly credit check to see the progress that you have made.
If your credit has improved enough and you think you’d be able to handle a traditional credit card, then it’s time to cancel your secured credit card. Using a normal credit card, with no deposit, may positively affect your credit more than a secured credit card as long as you keep the balance low and make all of your payments on time.
There is no limit to using a prepaid card other than the amount loaded onto it. Prepaid cards are wonderful for many different scenarios. They can be used to to lessen you own fees and increase your overall debit card convenience or you can use it to track a teen’s spending instead of signing up for a new bank account. Since prepaid cards do not affect your credit history and credit score, feel free to use them however you see fit.
Secured credit cards and prepaid cards are both extremely beneficial in their own ways. Each card offers convenient usage with little risk. Whether you are rebuilding your credit or trying to monitor your spending, each of these cards can help you get back on track. Anyone can use a secured credit card or prepaid card to their financial advantage. Each of these cards is a great place to start if you want something low commitment that will help you build your credit and/or practice some solid financial basics. Creating a strong financial system and foundation can help you form strong habits that will follow you into the future.
Image Source: https://depositphotos.com/
Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.
This post was updated December 18, 2017. It was originally published August 16, 2017.