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Prepaid Debit Cards vs. Secured Credit Cards

Prepaid Debit Cards vs. Secured Credit Cards

*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.

This article was last updated Mar 22, 2013, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.

Prepaid debit cards and secured credit cards are great payment options for people with poor credit. Nearly 8.2% of Americans are "unbanked" (2011 FDIC survey), meaning that they choose to store their money outside of traditional financial institutions. If you are a part of this group, you may be in need of a prepaid or secured credit card. You may also need a card like this to build your credit, control your spending, or do any number of activities that require money. You might as well take the time to know your options.

What is the difference between prepaid debit cards and secured credit cards? That's what we're here to find out. Let's compare both of these credit card options so you can find the best one for you.

How Secured and Prepaid Cards Work

For both secured credit cards and prepaid debit cards, you have to be the one funding the account. You do not get a line of credit like you would with an actual credit card. You put money into the account that you can use for purchases in the future.

The difference between these cards lie in the way you go about using and depositing money on them. With a prepaid card, you load whatever amount of money you want and then spend it as you want. The card essentially acts as a carrying tool for all your cash, simplifying your finances and minimizing your wallet. With a secured credit card, you deposit a certain amount of money at the very beginning and then pretend that is your credit limit. If you want to have $3,000 to spend at all times, that is what you load. Then you pay it back all at once or over the course of several months, just like you would a credit card. You still owe interest on the card, and you still have to make minimum payments. You don't have those kinds of commitments with a prepaid card.

Who Needs Secured Credit Cards?

If you're unbanked because of poor credit, a smart choice would be to apply for a secured credit card. Secured credit cards require a deposit up front which is equal to your credit limit, 12179506_sthen works as a normal credit card. Should you default on your agreement, the bank has your deposit as collateral so they're covered.

The benefit of owning a secured credit card comes in building credit. Unlike prepaid debit cards, secured credit cards report to the three major credit bureaus and will help improve your credit score. Over time, many secured credit cards allow you to change your account to an unsecured credit card and will subsequently refund your deposit. You must keep up with your payments for that to happen.

Also, if you are looking to get a feel for what owning a credit card is really like, choose the secured option. This will require you to keep up with payments, maintain a budget and monitor your account as you normally would. There may be more costs involved this way, but you will learn better money management habits if you use a secured credit card.

Who Needs Prepaid Debit Cards

If you're unbanked because you choose to be, then a prepaid card is a better fit for your wallet. Cash doesn't work everywhere, as paying for things like 12178727_sutilities and airline tickets must usually be done online or with a credit card. Prepaid debit cards are a great way to stay out of the grid while having a payment method for non-cash purchases. The prepaid debit cards can offer no fees and free ways to add money to your account. Bad prepaid cards, the ones that nickel and dime you, cost more money than you'll ever use. That is why it is important to look for the right card early on.

Prepaid debit cards also work well as presents because you can load money onto them to be used wherever. A lot of people do this as an alternative to gift cards because they do not want to give people specific money that they can only use one or two places. You may load a prepaid card with money for one of your children, modernizing his allowance and keeping track of the money spent. You may even use a prepaid card to travel with, if you don't want to carry cash in a foreign location.

Choosing the Best Option

Now that you know the difference between prepaid debit cards and secured credit cards, think about the option that best suits your needs. If it turns out you need a bit of both, get a couple cards to have on hand. Make sure you note the methods of deposit for each card. Some will require you to go to a store to load money. Once you find what you are looking for, fill out an application for instant approval.

*Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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