What’s the Difference Between a Secured Credit Card and a Prepaid Debit Card?

A lot of us prefer plastic when it’s time to pay. Even though cards might look very similar, they’re not all the same. You can choose from several different kinds of accounts, depending on what your goals are, and still enjoy the convenience.   

Let’s explore secured credit cards and prepaid debit cards, and what each kind of card could help you achieve.  

How Does a Secured Credit Card Work?

A secured credit card works like a regular credit card. You can make purchases with the card and pay for them over time. The big difference is that you have to send the credit card issuer a cash deposit to open the account.  

This deposit acts as security in case you fail to make your payments. If you have a low credit score or no credit score, you have a very good chance of getting a secured credit card. Some don’t even require a credit check.  

Like any credit card, a secured card lets you make purchases using borrowed money. Your purchases and other transactions are added to the balance you owe. You’re given a credit limit which caps the size of the balance you can build up.

If the card has an interest-free grace period, you can pay off your purchases by the due date and you won’t pay any interest.

If you don’t pay off your balance each month, you’ll pay interest on the balance that you owe. Some cards also charge an annual fee or other charges. 

If you owe a balance on the card, you’re required to make at least a minimum payment every month. 

An important point: Even though you have a security deposit on the card, you are expected to make monthly payments on any amount you owe.

How Does a Prepaid Debit Card Work?

With a prepaid debit card, you can only spend the money that’s in the account. You’re not borrowing money. You won’t make payments or pay interest.

To put money into the account that you could spend by using the card, you have a few options.

• Reload your card yourself. Some prepaid debit cards can be funded with cash by visiting a retail store such as Walmart or 7-11, or at an in-network ATM or bank branch.

• Direct deposit. You can set up your paycheck direct deposit to go to your prepaid card account.

• Electronic transfer. If you have money in a bank account, you can electronically transfer it to your prepaid card account.

• Mobile deposit a check. Some prepaid cards allow you to deposit a check into your account by using their app to take a photo of the check with your phone.

Prepaid cards often charge several types of fees that you’ll want to watch out for. The following are some of the most commonly charged fees:

• An activation fee for starting the account

• A monthly fee, even if you don’t use the card that month

• A transaction fee whenever you use the account

• A reloading fee when you put new money into your account

• Fees for specific kinds of transactions

Those fees are taken out of the amount you have on deposit with the card. Not all prepaid cards charge these fees. For example, if you want to receive direct deposits, find a card that offers that option for free.

How Do Secured Credit Cards Affect Your Credit History?

For many secured cards, you’ll need to agree to let the creditor check your credit when you apply. That’s called a hard inquiry, and it can temporarily lower your credit score by a few points. 

Then, secured cards typically report your account activity to the credit bureaus, though you should confirm this before signing up for a card. A secured card can only help you build a credit history if the issuer reports your account to the credit bureaus. Most people want to move to a traditional credit card when they can, and get their security deposit back. This could happen in 6-12 months.

The two biggest things you could do to put yourself in the best position to establish a good credit history are pay on time every month and keep your balance low. Maxing out the card could hurt your credit score. 

How can you keep the balance low and still use the card? Ask your credit card company when they report your balance to the credit bureaus, and make your payment before that date.

How Do Prepaid Debit Cards Affect Your Credit History?

Prepaid cards are a great way to manage your budget and avoid debt. But they don’t affect your credit history one way or another. That’s because you pay for things out of money you have on deposit, and aren’t using credit.

Secured Credit Card vs. Prepaid Debit Card Comparison

The following is a summary of key features of secured credit cards and prepaid debit cards:

Secured Credit Card or Prepaid Debit Card: Which Is Right for You?

Secured credit card: Typically used by people who want to build credit or rebuild credit.

Prepaid debit card: Great for someone who wants to manage finances without having to hold onto cash or pay interest, or for someone who doesn’t have a bank account.