What is the Difference Between a Prepaid Card and a Secured Card?

Consumers need to have at least one credit card in today’s society. Without a credit card, you are not able to rent a car, reserve a hotel room or even shop online. Prepaid and secured cards are a viable alternative to traditional credit cards and give consumers who need to build or rebuild credit a practical credit card choice.

Prepaid Cards

With prepaid credit cards, you can only spend the amount of money you have personally paid up front to the card issuer, who then “loads” that amount onto the card. The prepaid card can be used wherever debit cards are accepted.

To purchase a prepaid card at a participating financial institution is easy. Each time a transaction is made, the amount is debited from the card with an additional transaction fee. Prepaid cards accept funds from any monetary source including direct deposits of wages, social security, child support, welfare and other disbursements.

Prepaid cards do have some drawbacks. When using a prepaid card for gas, some stations will place a hold of additional funds if buyers pay at the pump instead of going inside to sign. Not all restaurants accept debit cards for meals, and hotels may put a hold on the estimated amount of your bill. This hold sometimes lasts a number of days after checking out of the hotel. The majority of auto rental companies will allow you to pay your bill with a prepaid card, but some companies require a credit card for reserving a rental. Finally, some banks charge ATM fees when you use a prepaid card to get cash.

Secured Credit Card

Secured credit cards are much different from prepaid cards. A secured card will help you establish or rebuild your credit history; its use is reported to the major credit agencies. When requesting a secured credit card from a financial institution, expect to have a permanent deposit at that bank that will directly reflect your line of credit. Most financial institutions start deposits for secured credit cards at around $300.

To continue to use a secured credit card, minimum monthly payments must be made to the lending institution. The goal of using a secured credit card is to establish a credit history that will allow you to qualify for a traditional credit card. Secured credit cards offer consumers all the benefits of having a credit card, but they charge a yearly fee, as well as a fee for each transaction.

Secured Versus Prepaid Cards

The difference between the two types of cards is that secured credit cards report to the credit agencies and prepaid cards do not. Secured credit cards function in the same manor as a credit card, but with a savings account deposit acting as security. Prepaid cards function in the same manor as a debit card, but they do not report transaction activity to the credit agencies. When using both cards, consumers can expect to pay higher processing and transaction fees.

It is essential to know that when considering a credit card to repair your credit history, it is best to apply for a secured credit card rather than a prepaid card. Prepaid cards, on the other hand, are excellent for gifts and for people who do not wish to use credit cards but need one for travel or other noncash transactions.

Anastasia Zoldak