The Difference Between Secured Credit and Prepaid Cards

Shopping for credit options when you have poor credit or no credit is tough. But a prepaid or secured credit card may be worthwhile options to consider. Understanding the differences between the two can help you narrow down your choices and ultimately make the best selection.

What is a Secured Credit Card?

A secured credit card is the better option if you to build your credit. Secured credit cards offered by a major credit card issuer will typically report your account history to at least one of the three major credit bureaus. If you’re responsible with your credit card, you can work to rebuild your credit score. Responsible credit card use includes making your payments on time each month avoiding high balances.

Getting a secured credit card requires you to make a security deposit for the credit limit. The deposit is only held as collateral in case you default on the credit card balance. As long as you repay your purchases on time each month, your deposit will be returned when you close your account.

Besides the security deposit, the card functions just like a regular credit card. Purchases are added to your outstanding balance and you’re required to pay at least the minimum payment on time each month.

What is a Prepaid Card?

Another electronic payment option is a prepaid card, which operates more like a debit card. You can use a prepaid card to make purchases in most places that accept credit cards, but it’s not an actual credit card. That means there’s no credit check to get approved and your account history isn’t reported to the credit bureaus. This is a good option if you need an account for making online purchases or an alternative to a checking account. However, if you’re interested in building your credit, a secured credit card is the better choice.

You have to load funds to the card before you can make purchases. Unlike a secured credit card, each of your purchases is taken from the balance you load onto the card. Once you deplete the balance, you must add more funds to your account to keep spending. There’s no monthly payment required.

What’s the Cost?

As mentioned, you’ll have to make a security deposit to get approved for a secured credit card. Fortunately, you have the opportunity to get that back. Some secured credit cards come with an annual fee. Other costs – late fees and interest can be avoided. For example, if you pay your full balance each month, you can typically avoid paying any interest.

Prepaid cards have more costs and those vary depending on the card. You may have to pay an initial activation fee to get your credit card. In addition, you may pay a monthly maintenance fee and transaction-based fees to to load funds onto your card, make a withdrawal from the ATM, check your balance at the ATM.

Security and Fraud Protection

Secured credit cards come with similar to protections to other credit cards. Depending on your credit card issuer, the card may come with zero fraud liability. This feature eliminates your liability for any unauthorized charges on your account. Otherwise, your maximum liability for fraudulent purchases on a lost or stolen credit card is $50, only when you wait to report the missing credit card.

Prepaid cards have similar protections to debit cards and reporting a missing credit card is critical. You could be liable for up to $500 if you wait more than two business days to report your card lost or stolen.

Which Should You Choose?

For most consumers, the choice between secured credit card and prepaid card comes down to whether you need a card to build credit or simply to manage your money.

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