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Prepaid Vs. Secured Cards: What’s The Difference?

Need to build credit? A secured credit card is a no-brainer. Had issues with credit card debt? Consider a prepaid card until you can get your spending under control.

Secured credit cards and prepaid debit cards may seem similar, but the two forms of plastic couldn’t be any different.

While both are a good option for people who don’t have great credit, they both have different functions and features. And picking the wrong one could make it hard to achieve your goal.

To help you get the right card for your needs, we’ll cover both in detail, along with their benefits and drawbacks.

The differences between prepaid debit cards and secured credit cards

It’s always a good idea to know what you’re getting before you apply for a financial product. Here’s what you need to know about each of these two options.

The fundamentals

The main difference between secured credit cards and prepaid debit cards is that one is a credit card and the other is a reloadable debit card.

This means that a secured credit card is based on a revolving credit line that you can pay off and reuse every month. With a prepaid debit card, on the other hand, you have to load money onto the card account to use it.

The likely reason the two get mixed up is that a secured card requires an upfront deposit— typically equal to the credit limit—to get approved for the card. But your credit line doesn’t draw on that deposit. Rather, the card issuer uses it as collateral in case you default on your payments.

Building credit

Since prepaid debit cards aren’t based on a credit line and you’re not borrowing money, they don’t benefit your credit history in any way.

On the flip side, a secured credit card can be a great way to build or rebuild credit as you use the card responsibly and make your payments on time each month.

That said, a secured credit card won’t do much to help you build credit unless the card issuer reports your activity to all three national credit bureaus each month. Some issuers report to only one or two bureaus, which doesn’t benefit you as much.

As you’re comparing secured credit cards, check to see if the issuer of the card reports to all three bureaus before you apply.

Interest

Prepaid debit cards don’t charge interest, but you could be on the hook for an overdraft fee if you spend more than you have in the account. If you apply for a prepaid card with overdraft protection, consider opting out, so you don’t run the risk of getting hit with a fee if you overdraw the account.

Secured credit cards do charge interest, but only if you carry a balance from month to month. As long as you pay your bill on time and in full each month, you can build your credit without paying a dime in interest.

If you do carry a balance on a secured card, though, you can typically expect to pay an interest rate upwards of 20 percent. So, make it a habit of paying in full each month.

Fees and costs

Both card types charge various fees, but for different reasons. Common costs you’ll find with a prepaid debit card include fees for monthly maintenance, ATM withdrawals, cash reloads and activating the card if you get it at a retail store.

Secured credit cards typically charge annual fees instead of monthly fees, and some don’t charge either. Other costs you might run into include fees for cash advances, late payments and charges that put your balance over your limit.

Features

Most secured credit cards come with a set of basic benefits that you can get with Visa or MasterCard. These benefits can vary by card but generally include things like rental car insurance, purchase protection and extended warranties. Most prepaid debit cards, on the other hand, typically don’t offer these perks.

Fraud protection

Until October 2017, prepaid debit card issuers weren’t required to provide fraud protection to cardholders. Now, you still could be liable for up to $50 of fraud if you report it within two business days, or up to $500 if you don’t report it within two business days.

With credit cards, however, many top credit card companies have zero-liability policies that limit how much you’re on the hook for if someone steals and uses your credit card.

Summary

Prepaid debit cards and secured credit cards serve different purposes. So it’s important to know what you need before applying for one.

As you consider the differences we’ve laid out and compared all of your options, take the time to consider what works best for your current situation. As you do your due diligence, you’ll have an easier time getting the right type of plastic on the first try.

» Compare the best secured credit cards or the best prepaid debit cards.

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