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 using a credit card to rebuild your credit. 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 with the current credit scoring system. 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.
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What Is a Secured Credit Card?
A secured credit card is a credit card that offers much less risk for the bank and the user. You must make a deposit 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, you’ll make a deposit 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.
What Is a Prepaid Card?
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 have smaller fees, free ATM withdrawals, and the type of card is often widely accepted.
Do Secured Credit Cards Help Build Credit?
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 in 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.
Do Prepaid Cards Help Build Credit?
Prepaid cards do not help you build your credit. That said, 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 any way you like. There are no payments and often there are very few fees or small fees since it is your own money. In fact, there are more options opening up every day with prepaid cards.
Oftentimes, you’ll find it is easier to transfer money 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 if you find yourself overspending quite often. What’s more, some prepaid cards offer a 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 the possibility of hidden fees. Make sure that you research the company and card program thoroughly before signing up.
How Do I Get a Secured Credit Card?
Secured credit cards are offered through banks, credit unions, and directly through credit card companies. No matter which credit card company you choose, 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 your credit will be affected in a different way. Your credit history 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.
Any bank will be able to pull a credit inquiry and see your 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.
How Do I Get a Prepaid Card?
You can purchase a prepaid card 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 start spending whenever you’re ready.
Remember, you’ll need to keep track of the funds on the card. If you’re trying to purchase a $10 item and you’ve only got $5 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 Long Should I Use Each Card?
Secured Credit Card
Good financial decisions, such as 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 significantly impact your overall score. That 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 canceling 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. 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 be a longer journey than someone with no credit, take advantage of your free yearly credit check to see the progress 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 apply for one — but don’t cancel your secured credit card. Pay it off and leave it open as a testament to your good standing.
Using a normal credit card 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 you load onto it. Prepaid cards are wonderful for many different scenarios. You can use them to minimize banking fees and increase your overall debit card convenience or you can use them 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, these cards can help you get back on track.
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Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.