March 26, 2009 - 7:49am
Borrowing money has become increasingly difficult under the dark cloud of the credit crisis. If you can’t qualify for a tradition plastic due to bad or no credit score, you have two available options - secured credit cards or prepaid credit cards. At first glance they have the same principle of work - you need to open an account and deposit funds before using the plastic. However, there are several fundamental differences that you need to know about to choose the most beneficial deal.
No matter what credit card you want to get – secured or prepaid – you need to make a deposit. Its amount depends on your financial abilities – you can put from $100 to $10.000. Your spending limit will be equal to the amount of your deposit. So if you put $200 in the account, you can charge up to $200.
The main difference between secured credit cards and prepaid credit cards is in the aim and usage of your deposit. As for secured credit cards, your deposit is intended to cover your debt if you default. The bank uses the security deposit as collateral while lending you its own funds. If you make regular timely payments, the lender will often reward you by increasing your credit line without requiring you to add money to your deposit.
Don’t think that the bank will immediately withdraw money from your account once you have made a late payment. An account which is less than 150 days delinquent will continue to accumulate interest and fees, so the total amount of your debt may be even higher than the security deposit.
As for prepaid credit cards, they work similar to debit cards, so your deposit will be used as your credit line. The cardholder spends money deposited by himself or someone else, for example an employer or a parent. That’s why the name “prepaid credit card” is just a marketing trick - you can’t borrow your own money!
With prepaid credit cards, you don’t have to undergo a credit check. There are no interest charges and credit bills. However, you often need to pay annual fees, set up fees, loading fees, check deposit fees, transfer fees, etc. That’s why prepaid credit cards are sometimes described as "an expensive way to spend your own money".
On the contrary, secured cards are credit cards, not debit ones. You have to make regular on time payments. Secured credit cards charge rather high interest rates on outstanding balances because the cardholder is looked upon as a credit risk.
The main advantage of secured credit cards is that lenders report your monthly payments to the credit bureaus. So using these cards wisely, you can build a solid credit score and qualify for traditional credit cards in future.
While using a secured credit card, keep in mind that accessing the entire available balance is not a good idea. Do you remember about the balance/available credit ratio that affects you credit score? So if you need to spend $500, it is recommended to put at least $1,000 in your account.
As for prepaid card, the issuers don’t report to credit bureaus. You don’t borrow money, right? Some issuers may report fees, but those payments will do nothing to improve your poor credit rating.
The main advantage of prepaid credit cards is the opportunity to max out your spending limit without accumulating debt or hurting your credit score. Once you have spent the funds you deposited, you won’t be able to make any more purchases unless you add money. It is very convenient if you tend to overspend.
Keep in mind that you may not be able to use a prepaid credit card for a purchase where a set amount of money is monthly deducted from the account, for example paid subscriptions. The reason is simple: there can be no money next month.
Who should consider applying for a secured credit card? It benefits people who have no or bad credit history because it gives a wonderful opportunity to rebuild your credit. If you are afraid to accumulate debt and just want to use a plastic for convenience (to make reservations for hotels or place orders online), then choose prepaid credit cards. They can be used all over the world where credit cards are accepted, but you can get away from monthly credit card bills.
No matter what credit card you want to get – secured or prepaid – you need to make a deposit. Its amount depends on your financial abilities – you can put from $100 to $10.000. Your spending limit will be equal to the amount of your deposit. So if you put $200 in the account, you can charge up to $200.
The main difference between secured credit cards and prepaid credit cards is in the aim and usage of your deposit. As for secured credit cards, your deposit is intended to cover your debt if you default. The bank uses the security deposit as collateral while lending you its own funds. If you make regular timely payments, the lender will often reward you by increasing your credit line without requiring you to add money to your deposit.
Don’t think that the bank will immediately withdraw money from your account once you have made a late payment. An account which is less than 150 days delinquent will continue to accumulate interest and fees, so the total amount of your debt may be even higher than the security deposit.
As for prepaid credit cards, they work similar to debit cards, so your deposit will be used as your credit line. The cardholder spends money deposited by himself or someone else, for example an employer or a parent. That’s why the name “prepaid credit card” is just a marketing trick - you can’t borrow your own money!
With prepaid credit cards, you don’t have to undergo a credit check. There are no interest charges and credit bills. However, you often need to pay annual fees, set up fees, loading fees, check deposit fees, transfer fees, etc. That’s why prepaid credit cards are sometimes described as "an expensive way to spend your own money".
On the contrary, secured cards are credit cards, not debit ones. You have to make regular on time payments. Secured credit cards charge rather high interest rates on outstanding balances because the cardholder is looked upon as a credit risk.
The main advantage of secured credit cards is that lenders report your monthly payments to the credit bureaus. So using these cards wisely, you can build a solid credit score and qualify for traditional credit cards in future.
While using a secured credit card, keep in mind that accessing the entire available balance is not a good idea. Do you remember about the balance/available credit ratio that affects you credit score? So if you need to spend $500, it is recommended to put at least $1,000 in your account.
As for prepaid card, the issuers don’t report to credit bureaus. You don’t borrow money, right? Some issuers may report fees, but those payments will do nothing to improve your poor credit rating.
The main advantage of prepaid credit cards is the opportunity to max out your spending limit without accumulating debt or hurting your credit score. Once you have spent the funds you deposited, you won’t be able to make any more purchases unless you add money. It is very convenient if you tend to overspend.
Keep in mind that you may not be able to use a prepaid credit card for a purchase where a set amount of money is monthly deducted from the account, for example paid subscriptions. The reason is simple: there can be no money next month.
Who should consider applying for a secured credit card? It benefits people who have no or bad credit history because it gives a wonderful opportunity to rebuild your credit. If you are afraid to accumulate debt and just want to use a plastic for convenience (to make reservations for hotels or place orders online), then choose prepaid credit cards. They can be used all over the world where credit cards are accepted, but you can get away from monthly credit card bills.