Secured Credit Cards vs Prepaid Debit Cards – Which Is Better?

by James on July 6, 2017 · 0 comments

2-400x267An unsecured credit card with a high credit limit can be dangerous in the wrong hands, with negligent cardholders capable of quickly accumulating debt. Without responsible use, overburdening oneself financially is surprisingly easy, putting many borrowers in shock when they see the effects of uncontrolled spending on their monthly statement. The total amount that can be charged on both secured credit cards and prepaid debit cards is limited in advance, making both effective tools for:

  1. Stemming one’s consumption and spending habits or
  2. Teaching credit beginners how to spend responsibly

How Do Prepaid Debit Cards Work?

A prepaid debit card is a like a bank card that had money loaded onto it previously. For example, one can purchase a debit card that has been prepaid with $500. When this card incurs $500 worth of charges through regular use, it effectively becomes useless: unable to pay for further purchases with money that is not available.

Prepaid cards are great for giving some purchasing power to a first-time cardholder, protecting one’s finances while traveling, or preventing stolen data (they are not connected with personal financial data). However, a big downside is that these cards do not contribute to the user’s credit report whatsoever. Given that borrowers with poor credit are one of the most relevant audiences for prepaid cards, the disadvantages may be significant for certain individuals.

 

Biggest Pros Biggest Cons
–       Curb spending effectively –       Often come with extra fees
–       Keep money safe when traveling –       Does not build credit

 

How Do Secured Credit Cards Work?

Secured credit cards also suppress the cardholder’s ability to overspend, but in a different way. The “secured” aspect in the card’s title means that the right to use it is contingent upon an initial security deposit made during the application process. This is not a permanent payment, and is usually returned by the issuer when the account closes in good standing. The total security deposit sets the card’s credit limit, effectively restricting spending over this amount. Cardholders then make monthly payments on their balance like a normal credit card.

The potential purposes for a secured credit card closely match those of prepaid debit cards, but with some serious advantages. Secured card issuers report payment progress to credit bureaus regularly, and can therefore help lift one’s credit score with careful use. Over time, many issuers will also offer better-performing customers an opportunity to upgrade to an unsecured card.

 

Biggest Pros Biggest Cons
–       Helps to build or repair credit –       Higher interest rates
–       Can come with rewards and perks –       May have balance transfer fees
–       No liability for fraud

 

Conclusion

While prepaid debit cards and secured credit cards share many similarities, many users will find that they can accomplish more with the latter variety. Before choosing a secured card for any single cardholder’s needs, we always recommend that potential applicants thoroughly research the available options ahead of time.

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