If you have bad credit, signing up for either a prepaid or secured credit card can be a great way to get your finances on track. But what's the difference between these two types of cards, and which is better for you? Read on to learn more about the differences between prepaid and secured credit cards.
Prepaid Credit Card
A prepaid card is very similar to a debit card in that you are spending your own money that you have already loaded onto the card. After making a deposit, that amount is available on the card for you to spend, exactly like you would a credit card. While this can be a helpful tool to manage your money, however, it does not help to rebuild your credit score since it is not a form of credit.
Secured Credit Card
Secured credit cards allow you to make a small deposit to "secure" the credit limit that you're assigned. This deposit can range from $300 to $5,000 and is equal to the credit limit in most cases. Beyond the deposit, this card works like a traditional credit card. Making payments on time and in full can raise your credit score, eventually allowing you to qualify for a traditional credit card. If you fail to make a payment, the amount past due is taken from your deposit and it is reported to the credit bureaus.
Comparison
In general, a prepaid debit card is for you if you are not able to qualify for a bank account. It can help you avoid the cost and risk of a check cashing store, which is the classic alternative for people who do not have a bank account. It also allows you to avoid the overdraft fees you could have with a bank account. A secured credit card is for you if you are not able to qualify for a traditional credit card but want to build your FICO score.
When choosing either type of card, be aware of the annual and monthly fees associated with the account, which can vary widely based on the type of card you have. Most cards have both a monthly or annual membership fee, while secured credit cards typically also charge interest on the balance you carry. Look for a card with low fees and low interest rates to avoid falling further into debt, and avoid cards that charge a fee for each transaction that you complete.
