How to Compare Secured vs Prepaid Credit Cards

People who are unable to get it a traditional credit card look to either a secured or prepaid credit card as an alternative. Although some people use them interchangeably, consumers must be aware that there are differences between a secured credit card and a prepaid credit card. Here are a few things to consider when comparing secured and prepaid credit cards.

Difficulty: Moderate

Instructions

1. Compare the funding mechanisms. A prepaid credit card is also known as a debit card or some people call it a reloadable credit card. Most commonly they're attached to a bank account and the limit is equal to the amount of money you have in the account (subject to a maximum daily withdrawal).
   
   Secured credit cards, on the other hand, have an initial funding which becomes the limit on the credit card. Therefore, if you initially fund the secured credit card with $500, your limit is then a $500. You may not increase the limit. The limit remains the same throughout life of the credit card.

2. Look at interest charges. Prepaid credit cards do not carry interest charges on the outstanding balanced. You're basically withdrawing money from your own bank account using the card.
   
   Secured credit cards charge interest on the outstanding balance. Therefore, if you have a $500 secured credit card and you use it to purchase $250 worth of items, you are charged a pretty hefty interest rate on the $250 outstanding balance.

3. Consider monthly billing. Prepaid credit cards or reloadable credit cards don't have a monthly billing cycle. You may get a monthly statement from your bank, but it only shows what the amount of money you have in your account. It is not a monthly bill.
   
   You do, however, receive monthly credit card bills for the secured credit card. The bill should outline the amount of the principal owed plus monthly interest charges and/or applicable fees.

4. Review the fee structure. Prepaid credit cards are usually subject to the fees customary to your bank account. If you use it at an ATM other than your own bank you're charged ATM fees. Review the fee structure for your bank account to find out any and all outstanding fees.
   
   Secured credit cards have set of fees also. They may charge an activation fee to initiate the credit card, an annual membership fee for the privilege of having the actual card, late payment fees if you’re late in paying and over the limit fee if you inadvertently attempt to charge more than your limit.
   
   Be aware that some secured credit cards also charge a fee if you speak to a bank teller, call customer service and some secured credit cards charge a per transaction fee. It's best to read the fine print before signing up for a secured credit card.

5. Determine if the financial institution reports to the credit bureau. Prepaid credit card activity is not reported to a credit bureau. Since it is actually a debit card, the bank does not report banking deposits and withdrawals to the credit reporting agencies.
   
   Credit card activity on a secured credit card is reported to the credit reporting agencies. For individuals looking to establish or rebuild credit, this is a viable, although expensive way to begin. It is extremely important to remain within the limit of the credit card and pay the monthly bills on time.

Tips & Warnings

• Since secured credit cards are expensive to maintain, once you’ve responsibly used the card for a period of about a year or so, it’s time to apply for a traditional credit card. It will save you money in the long run.
• Consumers should be aware that credit-reporting agencies frown upon cardholders accessing 100% of the available credit card limit. If you regularly use approximately $500 per month on a credit card, you should fund a $1,000 secured credit card.