Secured Cards vs. Prepaid Cards: What’s the Difference?

man with credit card

Credit cards and debit cards provide a convenient method to make purchases. However, it seems as though every time you turn around, there is a new card being offered. Even among credit and debit cards, there are different types such as prepaid and secured credit cards.

How are you supposed to choose the right card if you can’t distinguish between the different types? Your choice may come down to your credit score, the fees involved and whether a card can affect your credit. Understanding these aspects of different cards on the market can help you make an informed decision between a secured card or a prepaid card. But first, you need to learn how the cards differ from one another.

The Difference Between the Cards

banks and credit

At first glance, the difference between a secured credit card and a prepaid card may seem obvious, but the difference is a bit deeper. Secured credit cards are unique in that the limit is set by the amount you put down as a security deposit. This amount usually falls between $200 and $500. So if you put $300 down as a deposit on a secured credit card, you only have $300 to spend. For example, if you make a $50 purchase, you then have $250 remaining to spend. Monthly payments to the credit card issuer help you bring the total amount back up to the original starting point.

On the other hand, prepaid cards are more similar to debit cards, except they have no connection to a bank account. About 18.7 percent of Americans are underbanked, meaning that rather than use a bank account at a financial institution, they use a prepaid card, cash, or other means.

A reloadable prepaid card allows you to load money onto the card. Once that money is gone, you must put more money on the card. Essentially, you can use the card so long as you have money on the card. There is no overdraft, so if a purchase exceeds the amount you have available on the card, you may be forced to use a different form of payment or not make the purchase at all.

In short, secured credit cards are a way for you to have a set credit card limit with monthly payments. Prepaid options, on the other hand, limit you to what is on the card, and you must reload the card to have funds available. Both have various benefits and drawbacks that you should understand before selecting which card may be right for you.

Advantages and Disadvantages of a Secured Card

As with most credit card options, there are pros and cons to a secured credit card. These factors may heavily influence your reason for getting a card, so be sure to carefully weigh each one before making a decision. The benefits of secured credit cards include the following:

While secured credit cards have many benefits that make them ideal for consumers, there are also disadvantages you should be aware of. First, there may be fees,  and you should watch out for interest rates, as some may be incredibly high. Making payments with high interest rates means you end up spending more than the cost of the original purchase. Sometimes, this can be much more depending on the card and the amount of your monthly payments.

Another drawback is the low credit limit. You won’t be able to make large purchases with a credit limit of $500. Also, you’ll ideally want to keep your balance well below the credit limit to show credit companies you can be responsible with the secured credit cards.

It’s important to keep in mind that each card is different and, therefore, has different pros and cons. You may want to invest a little research into a few different secured credit cards to see if one appeals to you more than the others. The pros and cons listed above are generally accepted as generic to the industry, but some credit card companies may offer exclusive benefits or fees, so it is best to research the card you decide on before signing an agreement.

Benefits and Drawbacks of a Prepaid Card

If secured credit cards do not sound right for you, consider a prepaid card. The advantages of most prepaid cards are

These cards are not accepted at all retailers, so you may not be able to use the card at some places. One of the most significant drawbacks is that there may be hidden fees you don’t think about until you’re hit with one, such as an ATM withdrawal fee.

Prepaid cards appear to be highly beneficial on the surface and may even appeal more than a secured credit card based on the benefits alone. However, one aspect that may be considered either a benefit or a drawback is the lack of an effect the prepaid card has on your credit. If you are not looking to build your credit, then this does not apply to you.

As with secured credit cards, these prepaid cards may also vary in the benefits and drawbacks associated with the card. Companies set certain benefits to draw customers in and make the card appeal to the audience, so be sure to thoroughly inspect the offering of the cards you are interested in to see if one suits your needs better than the others.

The Right Card for Building Credit

secured and prepaid credit card

One of the major differences between the two cards is the ability to affect your credit, in both good and bad ways. Prepaid cards cannot help you build credit and, as such, they do not affect your credit at all. That also means your information is not provided to credit bureaus with these cards.

On the other hand, secured credit cards can help you build your credit in a safe and controlled manner. Your information and usage of this card is reported to one or all of the credit bureaus, thereby establishing or rebuilding your credit. If you are looking to build your credit or repair it, the secured card may be your best option.

Choosing the Card That Fits Your Needs

There are different reasons for choosing a credit card and various reasons for choosing one card over another. In order to find the card that is right for you, you should first determine what your goal is. Do you want to build your credit? Do you want to budget better?

Then there are the benefits and drawbacks of each card. Would you rather have a credit card that has a rewards program or a prepaid card that allows ATM withdrawals? Answering these questions and researching the pros and cons of the different cards can help you decide if a secured credit card or a prepaid card is right for you.

Learn More About Your Credit

Secured credit cards and prepaid options both have benefits to help consumers make purchases, and understanding the difference between the two is important. Having options for building credit and increasing your spending methods provides you with greater freedom in your spending but also greater responsibility.

Staying on top of your credit can be tricky, but it doesn’t have to be. CreditRepair.com can help you learn more about how to fix your credit and understand how to build credit. Sign up for an account today so you can get your credit back on track.

Sources: ConsumerFinance| MoneyTalksNews| USAToday| Forbes | Bankrate

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