Secured Credit Cards vs. Prepaid Credit Cards

People who are dealing with the situation of having no credit or poor credit may find that there are very few credit card offers that are open to them. This is especially true in the current state of the economy which has tightened up a bit and isn’t making so many offers to people without good credit. There are typically two types of credit cards that someone in this position might find themselves being able to get. One is the secured credit card and one is the prepaid credit card. Because of some similarities between the two types of cards, many people with poor credit think that they are the same thing. However there are some important differences between the two. Understanding these differences can help you to determine which type of card would be more appropriate for you.

Secured Credit Cards

Secured credit cards are credit cards that require you to open up a bank account with the credit card company in order to be able to get the credit card. This means that you have to have a lump sum of money to put into the account so that you can use the credit card. The amount of money that you put in typically becomes the credit limit for the card. In other words, if you put $1000 in to the account then you have a credit card which allows you to use up to $1000. When you make monthly payments on the card, it will reduce the balance that you owe. For example, if you spend $500 on this same card then you would have $500 left before exceeding your credit limit. If you paid $200 of that then you would have $700 left to spend on the credit card.

Prepaid Credit Cards

Prepaid credit cards are similar to secured credit cards in the sense that you have to put money on to them to be able to use the credit card. In other words, you would purchase a prepaid credit card for $100 and then you would have $100 to use on the credit card. The difference between this and the secured credit card is that you don’t have to open up an account to do this. Instead, you’re just putting money on to the card that you can spend later.

Important Differences between Secured Credit Cards and Prepaid Credit Cards

There are some important differences to note between these 2 types of cards. One of these is fees. You have to pay a small fee to get a prepaid credit card and usually a larger annual fee to get the secured credit card. You also have to pay interest on the secured credit card which isn’t the case with the prepaid credit card. And you have to make monthly payments to pay off the secured credit card which isn’t the case with the prepaid credit card. So it sounds like the prepaid credit card is better, right? Not necessarily. The prepaid credit card doesn’t ever show up on your credit report so you can’t use it to establish better credit whereas responsible use of the secured credit card will result in a better credit score so that you can qualify for some of the better credit cards available in the marketplace later on.

This entry was posted on Monday, August 18th, 2008 at 8:17 am and is filed under New Card Offers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.