Editorial Policy

Prepaid or secured card: Which is best for you?

Miranda Marquit

January 14, 2015

People love the convenience of whipping out a credit or debit card issued from their bank.

These kinds of cards dominate the spending habits of consumers, according to a July 2014 update of the 2013 Federal Reserve Payments Study. No hassling with cash or checks. But what if you don’t qualify for a credit card? What if you can’t land a bank account?

Meet the prepaid debit card and the secured card. Here’s what you need to know about them before you decide whether they are right for you.

How they work

Because both prepaid debit and secured cards require an upfront payment of cash before they can be used, it’s easy to mistake one type of card for the other.

“Both secured credit and prepaid debit function like a regular credit card when you pay at the cash register,” says Matt Schulz, a senior industry analyst with CreditCards.com. “But there are important differences.”

Prepaid debit is designed for you to have the convenience of plastic, without the need to borrow. You can usually reload the cards. You add a specific amount of money to the prepaid debit card, and once you use it, the money is gone. You need to reload the card.

Secured credit is a loan. “You put up money as a security deposit, but it’s more like collateral on a loan,” says Schulz. “The money used as a security deposit is not accessible for use as a payment on your credit balance, and the card functions like a traditional credit card, in that what you charge is borrowed money, and you pay interest if you carry a balance.”

It’s also important to note that your prepaid debit payments (in the form of reloading your card) won’t be reported to credit bureaus. A secured credit card, though, is a loan, so your payment history is usually reported. (In order to build your credit, your payment history has to be submitted to the three major credit bureaus, Experian, TransUnion and Equifax, so check with the issuer.)

The costs

These forms of plastic come with costs that you can’t usually avoid. “A prepaid debit card often has fees associated it,” says Lilia Rojo, the vice president of operations at SCE Federal Credit Union. “Additionally, a prepaid debit card may not offer the cardholder the same protection as a credit card.”

Prepaid debit cards might come with monthly maintenance fees, reloading fees and even fees to check balances and talk to customer service. “It’s important to carefully read any disclosures so that you understand the terms and conditions,” says Rojo.

Secured cards have their own costs. Some secured cards charge hefty upfront fees for setup, and they might also come with annual fees. Some secured cards also charge very high interest rates. “Finances charges can add up if you allow the balance to revolve,” says Rojo. “If payments are not made in a timely fashion, you may be subject to late charges.”

The right card for you

Even with the costs, there are some who can benefit from prepaid debit and secured credit. However, you need to understand your goals before you choose which card to use.

“Secured cards can be good for people who are trying to rebuild their credit, or they can be good for folks who are just getting started with credit,” says Schulz. “It allows them to build credit, but not go crazy with it.” But for the card to work as a credit-builder, it is best to pay your bill in full and on time every month.

On the other hand, prepaid debit is an option if you can’t get a bank account. In fact, prepaid general-purpose cards are the fastest growing of noncash payment options, according to the Fed study.

Also, Rojo points out that there are no age restrictions on prepaid debit cards, which make them ideal for minors. Schulz points out that many parents use prepaid debit for allowance. “Nowadays kids aren’t used to carrying cash,” he says. “They are learning to carry plastic.”