Differences Between Secured And Prepaid Credit Cards

Saturday, June 2, 2012, AM | 5 Comments

Many folks have problems getting a traditional credit card mainly due to their bad financial state that they have fallen in. Therefore, the credit industry started offering prepaid credit cards (acts like a debit card) along with secured credit cards. In that sense, many folks define them both interchangeably. However, there are quite distinct differences between the two.

As is explained below, with one kind, you can build your credit history over time whereas with the other you can’t.

  1. Funding

    Funding for both types of credit cards is established differently.

    • Prepaid credit card
    • Prepaid credit card is reloadable. It is attached to your bank account. The limit is usually what you have in your account. Many banks put daily withdrawal limit.

    • Secured credit card
    • Secured credit card has an established initial funding and becomes the maximum limit. It remains so throughout its existence. You may not increase the limit.

  2. Interest charges

    Interest charges are paid on outstanding balance. Only one of the two types of cards can carry interest charges.

    • Prepaid credit card
    • The outstanding balance is what you have remaining in your bank account. By default, there can be no interest charges on the remaining balance.

    • Secured credit card
    • Secured credit card carries interest charges on the outstanding balance. If you have $1,000 limit and you spend $500 in the month, you would be charged very high interest on the outstanding balance. That’s a big negative.

  3. Fee charges

    Both types of credit cards can carry fee charges. However, because of the different nature of them, the fee structure is quite different.

    • Prepaid credit card
    • Prepaid credit card is in essence your debit card. If you use ATM at another bank, you would be charged fee.

      Otherwise at the same bank as your debit card, most banks don’t charge any fee.

      There can be overdraft charges if your bank account does not cover the amount. But that usually is the characteristic of your account.

    • Secured credit card
    • Secured credit card can carry a variety of fee charges depending on how it is used. Charges usually take effect for

      • Activating the card
      • Annual membership fee
      • Late payment fee
      • Over the limit fee

      Word of Caution
      Be aware of the following circumstances as well. Some secured credit cards charge

      • Fee if you speak to a bank teller
      • Per transaction fee
  4. Monthly Statement

    The nature of monthly statements is quite different.

    • Prepaid credit card
    • The monthly statement you receive is from your bank account. It’s just a regular statement and not a bill of any kind.

    • Secured credit card
    • You do receive a monthly bill outlining the amount of the principal owed plus monthly interest charges on the outstanding balance and/or applicable fees.

  5. Reporting to credit bureaus

    Status for only one of the two types of credit cards is reported to one or more credit bureaus.

    • Prepaid credit card
    • Because prepaid credit card is in essence debit card, we all know that you cannot build a credit history with debit card. So reporting to credit bureaus is non-existent.

    • Secured credit card
    • If you are looking to establish or rebuild credit, this is a viable alternative to prepaid credit card. However, if you are not careful in your payment, it can be expensive way to begin.

In a Nutshell
With secured credit card you can establish or rebuild your credit history. But you have to be very careful in paying your bills on time and in full if you can.

It’s best to read the fine print before signing up for a secured credit card.

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  1. 5 Responses to “Differences Between Secured And Prepaid Credit Cards”

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