Pre-Paid versus Secured Cards

In today's society, it is virtually impossible to do many things without a major credit card, whether it is making an online purchase, reserving a hotel room, or renting a car. For people who have had past or present credit problems and for young adults just starting out and trying to establish credit, pre-paid and secured cards are often the only option. But, what is the difference between the two, and does the difference really matter?

Answering the last question first, yes, the difference matters, but more on that later.

A pre-paid card is similar to a traditional checking account ATM or debit card, in that the card holder must deposit an amount of money into an account. The card can then be used for purchases up to the amount of the deposit, less any fees imposed on the account. As purchases are made with the card, the amounts of the purchases are automatically and immediately deducted from the deposit amount. The card holder can deposit additional funds at their discretion, and then have such additional amounts available for additional purchases. Basically, the credit limit is the amount on deposit at any given time.

A secured card is actually very different, in most respects. The card holder must also deposit funds, but into a separate savings account. The amount of the deposit acts as security for the linked secured credit card account. The card holder also generally has a credit line equal to the amount deposited, but rather than having the amounts of purchases deducted from the savings account, those funds remain in the savings accounts. The card hold must them make monthly payments, covering the purchase amounts, or lesser amounts as per specific card issuer agreements, plus fees and interest. Money is only deducted from the savings account is the card holder fails to make the required payments. If that occurs, then unpaid payments and late fees will be deducted from the security deposit account.

Now, for the key difference between the two types of cards. Pre-paid cards are just that and nothing more. Using a pre-paid card will provide the advantage of having a card to use for purchases, but it will never be anything more than a pre-paid card. No good credit history is built up by its usage, and nor favorable credit reporting will be sent to credit bureaus. On the other hand, the holder of a secured card can improve their credit rating and build a good credit history by making on-time and full payments over a period of time. Building this good history with a secured card improves the card holder's likelihood of obtaining a traditional unsecured credit card in the future.


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