Pre Paid Credit Cards vs. Secured Credit Cards: Financial Institutions Offer Both but Which Credit Option Works Best

Whether an individual has poor credit and is looking to rebuild a credit score or wanting to get away from monthly credit card bills, consumers must understand that prepaid credit cards and secured credit cards are not interchangeable. It’s important to know the differences before applying for either card.

Prepaid Credit Cards

A prepaid credit card is a debit card. In essence, all one has to do is open an account with a bank and request a debit ATM card. Most banks automatically issue a debit card when opening an account.

Prepaid credit cards look just like traditional credit cards. They sport either the MasterCard or Visa logo and can be used wherever credit cards are accepted.

The benefit to having a prepaid credit card is that the consumer does not have to undergo a credit check. Most prepaid credit cards do not charge an annual membership fee and there are no monthly bills or interest charges.

If the prepaid credit card is lost or stolen, and reported immediately to the issuing financial institution, the card holder is not held responsible for fraudulent charges as long as the card is reported as lost or stolen immediately. Consumers, should, however, check with the lost/stolen policy of the issuing financial institution as the amount of time to report a card lost or stolen for protection may vary.

While it is recommended to go through a local banking institution to get the best deal on a prepaid credit card, there are some financial institutions that offer prepaid credit card services. Websites like credit card.com provide a listing of financial institutions offering prepaid credit cards.

Always be sure to read the fine print, especially if ordering a prepaid credit card online. Some online prepaid credit card companies have built-in fees that are not normally found on cards issued through local banking institutions.

Secured Credit Cards

Although the face of a secured credit card looks just like a prepaid or traditional credit card, that’s where the similarities end.

Secured credit cards are pre-funded by the cardholder and the initial funding sets the credit card limit. Therefore, an initial funding of $500 gives a cardholder a secured credit card with a $500 limit.

Unlike a prepaid credit card, secured credit cards charge rather high interest rates on outstanding balances. Additionally, many secured credit cards charge annual membership fees and balances are billed monthly.

Generally, a cardholder gets a secured credit card in an attempt to rebuild poor credit. If the individual has recently undergone a bankruptcy or has derogatory items on her credit report, it’s difficult or impossible to get a traditional credit card. Secured credit card issuers offer cards at a high interest rate because the cardholder is looked upon as a credit risk.

While using a secured credit card, the cardholder must understand that accessing the entire available credit card balance is not looked upon favorably by the credit reporting bureaus. Therefore, if a cardholder needs to use $500 in credit card transactions, it is recommended to pre-fund the secured credit card with $1,000. In essence, the cardholder is giving the financial institution a $500 loan and is forced to pay interest when using her own money.

Graduating to a Traditional Credit Card

It is not necessary to graduate from using a prepaid credit card. There are no penalties and it is similar to using cash. A secured credit card, on the other hand, is a necessary means to an end. Once the cardholder has successfully used a secured credit card for approximately a year, it’s best to apply for a traditional credit card.