Secured credit cards and prepaid cards have the potential to be incredibly useful tools when helping someone in the midst of tackling and building financial fortitude. Although they both can help set boundaries and lift individuals out of tough situations, these cards are completely different and have very specific uses. If not careful, they can also negatively impact an individual who doesn’t use them strategically for their intended purpose.
A prepaid card is a card that the account holder’s spending limit is directly tied to how much money they have loaded on the card. If $300 is deposited on the card, then that is all the card owner can use until more money is loaded on the card. In this way, a prepaid card is actually very similar to a debit card because you are spending your own personal cash rather than a loan.
On the other hand, secured credit cards operate similarly to a traditional rewards credit card. You have a credit limit and you must make monthly payments to pay down your balance. The biggest difference between a secured credit card and an unsecured, traditional credit card is a security deposit is required as collateral to open the account. Unlike the prepaid cards, the deposit on a secured card is not used.
Secured vs. prepaid cards: The basics
Fees can add up, so it’s important to know what type of fees are to be expected from a secured credit card and a prepaid card. Most secured credit card fees are pretty reasonable and tend to be fees you’d typically see with any other credit card like an annual fee, overdraft fees and late fees. Be on the lookout for other fees like cash advance or balance transfer fees. Not all secured cards carry those fees, so choose wisely and accordingly.
While secured card fees are minimal, prepaid card fees can definitely get out of hand. It’s important to shop around for a prepaid card with the least amount of fees. With prepaid cards, typical fees include activation fees, monthly maintenance fees, reloading fees, ATM fees and transaction fees.
The biggest benefit of a secured credit card is the capability to build credit. This is particularly appealing to those without a credit history or who are trying to repair bad credit. It also is helpful to create a controlled credit card usage with lower limits. This type of environment is conducive to getting a handle on credit card debt that may have gotten out of hand.
Prepaid cards are also beneficial in helping curb unnecessary spending because the cardholder has a set, clear limit on what spending is allowed. Prepaid cards are also ideal for budgeting, whether that’s setting up an allowance, spending limit or just try teaching kids about money.
Effects on credit
Secured credit cards are the perfect tool to improve your credit. As long as balances are paid monthly and utilization is kept low, they definitely offer a great opportunity to fix a low or bad credit score. It’s important to note that the security deposit on the secured credit card cannot be used to pay down the balance—it’s strictly to ensure that if something goes wrong and you default on your payments the lender has their backs covered. Keep in mind that, just like a traditional credit card, a bank may run a hard inquiry which would cause your credit to take a temporary hit.
Prepaid cards don’t impact credit scores; the money used on a day-to-day basis is the set amount of money that the cardholder loaded into the account to fund the use of the prepaid card.
Which option is right for you?
Here are a few pros and cons to keep in mind when considering a secured credit card or prepaid card.
Secured credit cards
A secured credit card gives those with new or bad credit a chance to raise their scores.
Due to the need for a collateral deposit, someone seeking a secured card has a really good shot at getting one.
Since you can typically only spend up to the amount of your deposit, secured credit cards are often great for reducing frivolous spending.
Secured cards make it possible for the cardholder to use services that typically don’t accept cash payments, like car and hotel rentals.
Many APRs on secured credit cards can be astronomical compared to that of a traditional credit card, so it’s important to pay monthly balances in full to avoid that interest rate.
Some secured credit cards don’t have a pathway to graduate to an unsecured card. This could leave a person with an account they no longer have a need for.
Look out for fees. Some secured cards include sneaky fees that may leave you with less credit available to use.
A security deposit is often needed as collateral on the account. If you aren’t prepared for a deposit, you may need to look for other options.
There’s no credit check required, so those with a particularly low credit score can still partake in this offering.
Since there is a limited amount of money on prepaid cards, they are the perfect tool for budgeting and monitoring spending habits.
It’s a safe way to make purchases because there is no personal data like a social security number linked to your prepaid card.
Prepaid cards don’t report to credit agencies, so they will not help you improve your credit if that’s the need you have for a credit card.
Unlike most credit cards, prepaid cards offer little to no reward benefits for cardholders.
Prepaid card fees can get quite hefty. This is because prepaid cards are not included in federal consumer protection programs, so companies have more leeway to charge fees.
The bottom line
When it comes down to it, the card that’s best for you depends on what financial goals you have. If you are looking to build or repair your credit, then a secure credit card might be the best option.
In order to obtain a secure credit card, a security deposit is almost always required as collateral on the loan. If you aren’t prepared to put down a lump sum or pay off your monthly balance on time, then this might not be the best option for you. After all, the goal is to improve your financial situation, not make it worse—and late payments can do just that.
If you’re simply looking for a budgeting tool or card that can be used for non-cash purchases, then it’s best to forgo a secured credit card and stick with a prepaid card. You only deal with cash that you have ready to go, so overspending is drastically limited, and it can never impact your credit score.
Now that you are armed with knowledge on these two tools, go for what makes sense with your situation.