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Prepaid Credit Card or Secured Credit Card

Should You Get a Prepaid Card or a Secured Credit Card ?

Many people are unaware of the differences between a prepaid credit card and a secured credit card, but for those trying to establish credit or rebuild their credit it is important to understand the differences. Both types of cards require up front funds to cover the credit limit, but this is where the similarity ends.

Prepaid Credit Cards:

Prepaid credit cards offer the convenience of a debit card but they do not help in establishing or rebuilding credit. Prepaid cards must be initially loaded with the amount the card holder wishes to have available on the card. The card may then be used like a credit or debit card to make purchases or pay bills. As the card is used and the balance begins to run low the card will need to be reloaded with additional funds to keep the card active.

Prepaid credit cards are offered by many different companies. These companies are often not banks, but independent issuers as in the case of one of the more popular prepaid credit cards from Wal-Mart.

The card holder is not required to make monthly payments.. however, neither is the issuing card company required to report to the major credit bureaus.

What Are the Advantages of Prepaid Cards?

The only real advantage to a prepaid card is the convenience of not having to carry cash and the ability to pay bills or make purchases online. For most individuals a checking account debit card may be a better choice than a prepaid card since it functions in much the same way.. and offers the additional advantage of establishing a customer relationship with a bank. Prepaid credit cards offer the greatest advantage to those who may be unable to establish a checking account for one reason or another.

Secured Credit Cards:

With secured credit cards, the card holder establishes a savings account with the bank issuing the card. The amount in the savings account determines the card holder's credit limit. The card is used like any other credit card. The card holders are sent monthly statements and must make timely payments on the card.

The savings account receives interest payments and is exactly like any other savings account except the deposited funds may not be withdrawn as long as the credit card is active. Secured credit cards are issued by government regulated financial institutions, which do make monthly reports to the credit bureaus, making these cards an excellent choice for establishing or rebuilding your credit history.

What Are the Advantages of Secured Credit Cards?

Unlike prepaid cards, which function more like debit cards, secured credit cards can actually help individuals rebuild or establish good credit. They are just like other credit cards but anyone can qualify for a secured card by opening a savings account with the lender. The savings account serves as security in the event the card holder fails to pay. If the card falls into delinquent status, the lender deducts the money from the savings account to cover the amount owing on the card.

Additional Facts about Prepaid Cards and Secured Credit Cards:

Prepaid cards do not charge interest payments since they are not actually a loan. There will normally be a monthly fee to cover accounting costs for the issuer who maintains the account.

Secured credit cards are a loan.. secured by money you have on deposit with the bank. Credit card interest charges do apply on these cards. Since secured cards are often issued to individuals with past credit problems, interest charges on secured cards may be higher than charges on cards offered to those with good credit scores.

Secured credit card companies make regular monthly reports to credit bureaus which will help people in establishing or re-establishing their good credit.

If the only reason an individual wants a credit card is for the convenience in paying bills or making purchases, a prepaid card may be a good choice. For consumers who are trying to build credit scores, a secured card would be the best option.


Article Courtesy of: CreditCardApprovalCenter.com


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