Secured vs Prepaid Credit Cards – Which is Better for You?

How do you feel about spending and budgeting? Depending on your answers, you’ll either choose a secured credit card or a prepaid card. So, which is better for you?

Secured vs Prepaid Credit Cards

If you’re trying to build or rebuild your credit, chances are you’ve heard of a secured credit card. But what about a prepaid credit card?

Many people think that you can build credit with these cards, but the short answer is you can’t. That’s not to say that prepaid cards don’t provide tremendous value for the right person.

Related: Why are Millennials Using Prepaid Credit Cards?

We tend to get a lot of questions on the debate between secured and prepaid cards, so in this article, I’ll discuss what each of them is and why you may want to consider getting one. Let’s first start by calling out some of the differences between the two.

Secured vs. Prepaid Credit Cards – What’s the Difference?

Before determining which credit card is best for you, let’s explore some of the critical differences between a secured credit card and prepaid credit cards.

Secured Cards

Secured cards work just like traditional credit cards. You can use them up to your credit limit (which is determined by a deposit–see below), and each month you’ll get a statement with your charges and the amount of your minimum payment.

If you make your payments on time, your credit score should improve, whereas late payments will hurt your score. This is par-for-the-course with all credit cards.

One thing that’s different, though, is that secured credit cards require you to make a cash deposit (typically $200 to $5,000) with the card issuer before you can use the card, and your credit limit is generally equal to the amount of your deposit.

The bank then holds your deposit as security in the event you fail to pay your credit card bill. That’s the basis of any secured loan. A mortgage loan, for instance, is secured to your home. If you don’t pay, the bank can take your house. A traditional credit card, on the other hand, is unsecured, meaning that if you fail to make a payment, there is no collateral tied to it.

Because of this security deposit, people with bad credit can generally qualify for a secured credit card, even if they can’t get a traditional card. That’s why these types of cards are perfect for those looking to rebuild their credit after a bankruptcy, foreclosure, or other adverse financially-related life events.

Prepaid Cards

A prepaid credit card works like a debit card. Once you deposit money on the prepaid card (via direct deposit, bank transfer, or cash), you can use the card anywhere that accepts debit MasterCard or Visa. It can be used to shop online, over the phone, or at virtually all retailers.

Once you’ve spent the money you initially deposited, you’ll need to add more funds to continue using the card. For this reason, these cards are often referred to as reloadable prepaid cards (in contrast to, say, gift cards). Because you’re spending your own money that you’ve added to the card, prepaid cards generally won’t help you improve your credit score.

Which Card is Right for Me?

Now that you have a basic understanding of each type of card, here’s a breakdown of some of the features to look for in a card. I’ll tell you if a secured card or a prepaid card offers them, and if so, which one is best.

Build Credit

Short Answer: Go with a secured card.

A secured card is a credit card, and it’s just secured to collateral that you put down (your cash deposit). Other than that and a small credit line, you’re holding a credit card. As I said above, if you make payments on time, you’ll build credit. If you miss payments, your credit will stay in the gutter.

Here’s an easy trick to get you started: get a secured credit card and sign up for a low recurring monthly service, like Spotify. Set up autopay on the credit card so when the bill comes every month, it’ll be automatically paid out of your checking account. This way, you are getting a service you’d already pay for, but you’re doing it with the secured card and building credit. Overall, the risk is low since you’re only charging about $10 per month.

Prepaid cards are not real credit cards. They won’t show up on your credit report, and you can’t miss a payment, because there are no bills. You can only spend what you’ve deposited onto the card. So there’s no way to build credit by solely using a prepaid card.

Learn More

The Capital One® Secured Mastercard® is a great option for those with very poor credit scores. There is no annual fee (and no fee to acquire the card) and the minimum deposit to gain a line of credit is either $49, $99 or $200. The amount of your deposit will depend on your credit history and your initial line of credit will be $200. You can always deposit more money to gain a higher line of secured credit.

Earn Rewards and Points

Short Answer: Neither type card will give you bonuses that you’ll care about.

If you’re looking to earn rewards from your purchases, neither a secured card or a prepaid card will give you what you’re looking for. If you have a secured credit card, the odds of you getting rewards are slim to none. If you do, they’ll be minimal.

Your only real hope is that after a certain period (and you can ask the card issuer this), you can “graduate” to a regular, unsecured credit card, which may offer better rewards (often, card issuers will do this after 12 to 18 months of on-time payments). Still, though, you’re better off using the secured card to build your credit up, then go out and get an excellent rewards card later.

With a prepaid card, you may get small rewards or perks, but nothing to write home about. The difference here is that you can’t “graduate” to a credit card, and typically a prepaid card won’t help you build credit to get to a better card. So if rewards are what you’re looking for, don’t get your hopes up.

Curb Spending Habits

Short Answer: Choose a prepaid card if you want to learn to spend less.

Since a prepaid card is loaded with cash that you put on it, there’s a finite spending limit. You can only spend as much as you’ve put on the card. Now, there are apparent loopholes around this (you can use another card, cash, etc.) but if you’re determined enough, you can use one prepaid card and set a spending cap for the week or month.

You may want to use it for things like discretionary purchases, though, not things like rent or utilities (since you have to pay those). We recommend using a tool like Personal Capital to create and manage a budget and use your prepaid card to help you stick to it.

A secured card, on the other hand, won’t (by itself) help you curb your spending patterns. It may, up to the small limit you receive, but overall you can spend as much as your limit allows. You’ll also get a bill in the mail since the money won’t be deducted right away.

If your primary goal is to spend less money, but you also need to build credit, try doing a combination of a secured card with an app like Debx–which will make daily payments to your credit card for you, thus making it function like a debit card.

Learn More

With the Netspend® Visa® Prepaid Card there is no activation fee, no minimum balance required and no credit check in order to be approved.  There are no late fees or interest charges and you’ll have access to the NetSpend Mobile App to manage your account.

Avoid Fees

Short Answer: It depends on how you want to use the card and how responsible you are with money.

First, let’s start with secured cards. Secured cards will come with all of the same fees a traditional credit card would. This includes finance charges (if you carry a balance), late fees (if you miss a payment), annual fees (if applicable; some have this, some don’t), and more. Each secured card will be different with its fee structure, so make sure to do your due diligence before selecting one.

Prepaid cards don’t come with annual fees or late charges like a secured card does–but they may come with activation fees and monthly maintenance fees (some of these can be worse than credit card fees, by the way). Many prepaid cards will charge you for withdrawing cash, paying bills, reloading money, and other typical things you’ll end up doing with a prepaid card. On the surface, it seems like it might be free (and some are, by the way) but you’ll want to make sure you read all the fine print before getting a prepaid card.

Overall, you really shouldn’t be using either card to get cash. On a credit card (secured card) it’s considered a cash advance and will be at a very high rate, along with some charges. A prepaid card is funded with cash, so it would make little sense to withdraw it back out (and potentially pay a fee). If you can manage to make your payments on time, go with a secured card. There are more benefits–namely building your credit. Plus, you can find secured cards without an annual fee, so it should cost you nothing if you’re responsible. Prepaid cards are great if you don’t plan to reload your balance often and are merely using it as a budgeting tool.

Extra perks

Short Answer: Hands-down, go with a secured credit card.

A prepaid card is mostly the same as using cash, just in a different form. Because of that, it gives you no perks or extra benefits. A secured card, on the other hand, is a credit card, so it gets the same protections that traditional credit cards have. This includes fraud protection (you’re not responsible for purchases you didn’t make if your card is stolen); insurances like car rental coverage and travel accident insurance; and purchase protection (depending on the issuer). Heck, you might even wind up getting a secured card that gets your points or discounts if you use it certain places.

Prepaid cards lose the federal protection that credit cards have so if this is important to you, I’d strongly recommend getting a secured card. Keep in mind that while there are standard protections that all credit cards provide, you may find issuers that offer additional perks on top of that, such as extended coverages.

When to Apply for Each

Both secured and prepaid cards are useful in different types of financial situations. So when should you apply for each one of these?

Secured Cards

If you’ve had a major negative financial event occur, such as bankruptcy, you’re best off waiting for at least six months after the event to apply for a secured card. There are two sides to this. First, something like a bankruptcy can be emotionally, mentally, and financially exhausting and stressful. You shouldn’t be adding anything to your plate at that time–just focus on getting your financial situation together (paycheck, rent, etc.). Most banks will also consider your financial event a little too soon to want to give you credit–even if it’s secured. So I’d recommend giving it at least six months to a year before applying for new credit. When you’re ready to manage a new card with monthly bills after that time period, go for it.

If you have no credit, you can certainly apply for a secured card, but you may be declined. If you’re unsure, I’d talk to a customer service rep at the bank you’re looking at, or a financial advisor. There are other ways to establish credit besides getting a secured card.

Prepaid Cards

There’s never a bad time to apply for a prepaid card, it really just depends on your situation. If you have no credit, want to start budgeting and cut back on your spending, or just want an easy way to separate your spending from a significant other, getting a prepaid card might be a good idea at any point in your life. Since you’re depositing the money and it’s basically a debit card, there’s typically no credit check or thorough application process needed.

Bottom Line

I can’t tell you which type of card is best–you have to make that decision for yourself. In most cases, I’d recommend a secured card because you get so much more. But I can also see why you’d want a prepaid card, such as its simplicity and ability to not allow you to spend more than you can afford.

To quickly recap, you’ll probably want a secured card if you:

  • Want to build credit
  • Are responsible with monitoring your spending
  • Have at least $200 to put down as a deposit
  • Need protections like car rental insurance and zero fraud liability

On the other hand, you’ll probably want a prepaid card if you:

  • Can’t keep up with monthly bills and payments
  • Want to make sure you never spend more than you have
  • Are interested in getting better at budgeting
  • Need to make smaller deposits more frequently

Either way, by reading this article it’s clear that you have the intention of improving your financial life in some way–so kudos to you. Please let us know in the comments below which card you ended up choosing and why!

Topics: Credit Cards

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