The differences between secured credit cards and prepaid credit cards can be confusing. This confusion can lead to cardholders mismanaging their accounts and seeing their credit scores fall – or stagnating when they expect their scores to grow.
The difference between secured credit cards and prepaid debit cards lies in the money you spend on using the card.
When you spend money with a secured credit card. you borrow it from the credit card company. This money is then reimbursed each month when you do your credit card payments.
When you spend money with prepaid card, you spend your own money. Indeed, before you buy something, you must load money on the card.
Secured credit cards help you rebuild your credit
A secured credit card can help someone build their credit because it involves borrowing and reimbursing money to a lender, which is the issuer of the secured credit cards.
Unlike secured credit cards, prepaid credit cards have no influence on your credit score if you do not use the card responsibly.
Like any other credit card, a secured credit card works with one key difference. Secured cards require a cash security deposit — usually between $200 and $300. The deposit usually equals your credit limit, so you will have a $500 credit limit when you deposit, say, $500.
The most significant thing to understand is that the credit card company does not use this money to pay for your purchases. When you buy items with a prepaid credit card, you have to pay for them, as much as you do for a normal credit card when your statement arrives. The deposit is there only in case you don’t pay your credit card bill. If this happens, the issuer takes the deposit to cover the amount you owe them (and possibly will also close your account).
Prepaid credit cards are like debit cards
A prepaid card also requires a deposit, but it is not a security deposit because it spends money. The card company uses the money you spend to pay for your transactions. Say, you spend $500 on this card then you’ve got $500 to spend when you load. Once you have spent it, until you put more money on it, you can’t use it again.
Secured credit cards can help you improve your credit score, while prepaid cards don’t even show up on your credit report. Since secure credit cards consist of continuous credit repayments, activity with secured cards is recorded by credit bureaus such as Equifax and TransUnion. You must ensure that your balance is small in which your payment is paid on time every month.
On the other hand, prepayment debit cards are the functional equivalent of your pocket cash. The money on the card is your money to get to use. You don’t borrow, so there’s nothing to report to the credit office or banks. Any kind of prepaid credit cards will not affect your credit score.
Cardholders may be confusing the inner working of these different cards:
Some people make a deposit on a secured card and think they spent money on the card. You deposit, say, $300, then pay $300 on the transaction, then you don’t pay the bill back because you aren’t even aware that you have to pay in the first place. Your credit ends up suffering in several ways: by maxing the card, by missing payments and by closing a non-payment account with the issuer.
Others are issued a prepayment debit card that is going to help construct their credit. They load money diligently on the card and never overspend. Yet their credit scores never go anywhere since no activity appears in their credit report.
Prepaid or secured cards: which one is right for you?
If you want to increase your credit score, get a secured card. Since you have to link your entire credit line equivalent in a cash deposit, secured credit cards don’t really provide you with additional “spending power.” The whole point of getting one is to show that you can handle credit responsibly — you can borrow money and pay it back, and you can access a credit line without maximizing it. Do this, and your credit will increase, as long as you do your credit cards payments on time.
If you’re looking for a tool to control your spending, get a prepaid credit card. They don’t help you build your credit history, but prepaid credit cards can be invaluable as a budgeting tool or a convenient method of payment. Do you want to set a hard limit on your expenditure? Put X money on a prepaid card a month and when it’s gone, you ‘re finished spending that month.