What’s a Prepaid or Secured Card?

secured_or_prepaidIf you have little or no credit you may be worried that you’ll never be approved for a credit card. While the popular rewards cards may be out of your financial reach at the moment, a prepaid or secured card might be a great option to consider. Take a moment to understand the differences between the two and then decide if either is a good fit for you.

Prepaid Cards

A prepaid card is a good choice for people who want to keep a tight rein on their spending but don’t want to use cash for purchases. It basically works like a debit card except that you deposit a certain amount of cash onto the card beforehand. Your spending is then limited to whatever amount of money is credited on the card. For this reason, these cards are a smart option for parents to give to their teens- you can control what they’re spending without just handing them cash. You can also use a prepaid card to make online bill payments- it works exactly like a regular credit card.

Since you use your own money to load the card, there is no credit check required to get a prepaid card. However, the biggest drawback to a prepaid card is that none of your transactions are reported to the credit bureaus. So using one will have no effect- either good or bad- on your credit.

If you want to build (or rebuild) your credit, a secured credit card is the better option.

Secured Credit Cards

Secured credit cards are also a good choice for people with poor or limited credit. But the big advantage they have over prepaid cards is that banks that issue secured cards report your payment history to the credit bureaus. Consistent, on-time payments will help improve your credit over time.

A secured card looks and works like a regular credit card. Here’s what happens:

  • When you apply for a secured card you will be asked to provide a security deposit.
  • This deposit will act as collateral if you ever default on your account.
  • Generally, the amount of deposit will be equal to your credit limit. (Typically, $300-$500)
  • If you make timely payments and manage your account responsibly you may qualify for an unsecured card after a certain amount of time (usually a year minimum).
  • If you choose to close your account your deposit will be returned (as long as your credit card account has a zero balance).