Comparing Prepaid Debit Cards and Secured Credit Cards

Comparing Prepaid Debit Cards and Secured Credit Cards

June 12, 2013         Written By Lynn Oldshue

Most people assume that prepaid debit cards and secured credit cards are the same. They both require some form of deposit to operate, and they are both available with no credit or bad credit. Nevertheless, there are key differences between prepaid cards and secured cards that may make one more fitting for you than the other. It is your job to assess your situation and figure out which option is better for you.

In this article, we will be comparing prepaid debit cards and secured credit cards so you can determine the better choice.

How Prepaid Cards Work

With a prepaid debit card, you are basically given an empty account to load or unload at any time. You get the card in the mail or pick it up in a store and then make whatever deposit you want on it. If you spend all of the money on the card, you don’t have to pay any of it back. You essentially turned the card into a checking account, minus the bank.

How Secured Cards Work

Secured credit cards are a lot different than prepaid cards, even though they seem the same at first. With a secured card, you make an initial deposit that serves as your overall line of credit. If you put in $2,000 when you apply for the card, that is how much money you will be able to spend at any time. The catch is that you have to pay this money back, just like you would with a traditional credit card.

Your deposit money isn’t lost forever. Should you decide to cancel the card, it will either be used to pay your back balance or it will be issued back to your original depositing account. You receive your money back in the end, but while you use the card, you have to treat it like something you owe. This makes a secured card more like a credit card because you will have monthly payments, interest, spending limits, etc. The only difference is that you are the one creating your line of credit.

Comparing Prepaid Debit Cards and Secured Credit Cards

Here are some key similarities and differences between prepaid cards and secured cards:

  • Credit requirements: You do not need to have good credit to get a prepaid card or a secured credit card. Since you are using your own money for deposits on each of them, you are guaranteed approval.
  • Credit reporting: Many secured card payments are reported to the three major credit bureaus once a month. Prepaid payments are not. If you’re trying to build your credit, you need to investigate using a secured card that reports to a credit reporting agency instead of a prepaid card. Prepaid cards are designed more for gifts or money storage.
  • Fees: In most cases, the fees for a prepaid card will lie in the transactions. You may pay a fee for every charge you make or for a deposit, depending on how the card is structured. With secured credit cards, you pay a monthly or yearly fee, plus interest on any unpaid balances you have. This fee system is set up more like a regular credit card.
  • Deposit limits: Both prepaid debit cards and secured credit cards are subject to deposit limits. For prepaid cards, you may be limited in the amount of money you can load onto the card at one time. With secured cards, you are limited in how much money you can put into the initial deposit. Once you reach that limit, you cannot extend your line of credit any farther.
  • Monthly payments: You do not have to make monthly payments on a prepaid card. How you use your balance is up to you. For secured cards though, you have to make some kind of monthly payment if you have a balance that has not been paid back. If you charged $500 on the card, you will owe a minimum monthly payment for that $500, which is usually a percentage of the balance plus interest. Once you pay back all the money, you will not have any more payments.
  • Travel usage: If you need a credit card to rent a car or book a flight, you will likely have to use a secured card. In some cases, these companies do not accept a prepaid debit card.

Now that you know the differences between prepaid debit cards and secured credit cards, you can figure out which one you need to use. Compare the costs and benefits of each card.

The information contained within this article was accurate as of June 12, 2013. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.


About Lynn Oldshue

Lynn Oldshue has written personal finance stories for for twelve years. She majored in public relations at Mississippi State University.
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