What’s the Difference Between a Secured Credit Card and a Prepaid Debit Card?

Many of us prefer plastic when it’s time to pay. Even though payment cards might look very similar, they’re not all the same. You can choose from several different kinds of cards, depending on your financial needs, your goals, and your credit score.

If you’re looking for a card you can get with any kind of credit history, such as after debt relief, secured credit cards and prepaid debit cards both fit the bill. Let’s explore how they work and what you could do with each kind of card.

How Does a Secured Credit Card Work?

A secured credit card works like a regular credit card. You can make purchases with the card and pay for them over time. The big difference is that you have to send the credit card issuer a refundable cash deposit to open the account.  

This deposit acts as security in case you fail to make your payments. If you have a low credit score or no credit score, you could still qualify for a secured credit card. Some secured cards don’t even require a credit check.  

Like any credit card, a secured card lets you make purchases using borrowed money. All your transactions are added to the balance you owe. You’re also given a credit limit, which caps the size of the balance you can build up. Every month, if you owe a balance on the card, you’re required to make at least a minimum payment.

If the card has an interest-free grace period, you can pay off your purchases by the due date and you won’t pay any interest. But if you don’t pay off your balance each month, the card issuer could charge interest on the balance you owe. Some cards also charge other types of fees, such as an annual fee or foreign transaction fees.

How the deposit on a secured credit card works

The security deposit on a secured card is often (but not always) equal to the starting credit limit. For example, if you pay a $500 deposit, the credit card issuer might start you off with a $500 credit limit. Many card issuers let you choose your deposit amount, giving you the option to deposit more if you want a higher credit limit.

An important point: Even though you have a security deposit on the card, you’re expected to make monthly payments on any amount you owe. You can’t pay your balance by having it deducted from your security deposit.

If you close your secured credit card in good standing, then you get a refund of your deposit. Some card issuers also offer a graduation option. If you make enough on-time payments, the card issuer may upgrade you to an unsecured card and refund your deposit. This could happen in six to 12 months, although it depends on the card issuer.

How Does a Prepaid Debit Card Work?

With a prepaid debit card, you can only spend the money that you’ve loaded onto the card's account. You’re not borrowing money. You won’t make payments or pay interest. Unlike a traditional debit card, a prepaid card isn’t connected to the cardholder’s bank account.

You have a few options to put money into the account that you could spend by using the card.

• Reload your card yourself. Some prepaid debit cards can be funded with cash by visiting a retail store such as Walmart or 7-Eleven, or at an in-network ATM or bank branch.

• Direct deposit. You can set up your paycheck direct deposit to go to your prepaid card account.

• Electronic transfer. If you have money in a bank account, you can transfer it electronically to your prepaid card account.

• Deposit a check via mobile app. Some prepaid cards allow you to deposit a check into your account by using their app to take a photo of the check with your phone.

Prepaid debit cards are easy to get, which is one thing they have in common with secured credit cards. Since you’re only spending money you deposit, you don’t need to pass a credit check for a prepaid card. You can purchase one online or in stores.

Prepaid debit card fees

Prepaid cards often charge several types of fees that you’ll want to watch out for. The following are some of the most commonly charged fees:

• Activation fee for starting the account

• Monthly fee, even if you don’t use the card that month

• Transaction fee whenever you use the account

• Reloading fee when you put new money into your account

• Fees for specific kinds of transactions

Those fees are taken out of the amount you have on deposit with the card. Not all prepaid cards charge these fees, so some of the typical fees are avoidable. For example, if you want to receive direct deposits, find a card that offers that option for free.

How Do Secured Credit Cards Affect Your Credit History?

For many secured cards, you’ll need to agree to let the creditor check your credit when you apply. That’s called a hard inquiry, and it can temporarily lower your credit score by a few points. 

Also, secured cards typically report your account activity to the credit bureaus, though you should confirm this before signing up for a card. A secured card can only help you build a credit history if the issuer reports your account activity to the credit bureaus. Here are the two most important habits to follow with your secured card to establish a good credit score:

• Pay on time every month. Your payment history is a huge part of your credit score. Each on-time payment is another step on the road to good credit.

• Keep your balance low. A high balance, or maxing out your card, can cause your credit score to drop. 

How can you keep the balance low and still use the card? 

Your card issuer only reports your balance once a month (and sometimes not even that often). Your balance could be several hundred dollars one day and zero the next day if you pay it off. 

It’ll help you if the zero balance is reported, not the higher balance from the day before your payment. You can make that happen by asking your credit card company when they report your balance to the credit bureaus. It might be your statement closing date each month. Then, just make your payment before that date.

How Do Prepaid Debit Cards Affect Your Credit History?

Prepaid debit cards don’t affect your credit history one way or another. You aren’t borrowing money when you use a prepaid card, and there’s no bill to pay or any risk of default. You pay for purchases out of the money you’ve already loaded onto your card. Prepaid cards are a great way to manage your budget and avoid debt, but they’re not designed for building or rebuilding credit.

Secured Credit Card vs. Prepaid Debit Card Comparison

Here’s a breakdown of the key features of secured credit cards and prepaid debit cards:

Zero-liability protection on secured credit cards and prepaid debit cards

The major card issuers and payment networks have zero-liability policies for unauthorized transactions. They go above and beyond the legal requirements by not holding customers responsible for any fraud on their accounts. This protection normally applies to any credit cards and debit cards they offer, including secured credit cards and prepaid debit cards.

Before you get a new card, check if the card issuer has a zero-liability policy. You can generally find out on the card issuer’s website or by calling customer service.

Secured Credit Card vs. Prepaid Debit Card: Which Is Right for You?

Here’s a quick summary of where each type of card shines:

• Secured credit card. Typically used by people who want to build credit or rebuild credit.

• Prepaid debit card. Great for someone who wants to manage finances without having to hold onto cash or pay interest, or for someone who doesn’t have a bank account.