Prepaid vs. Secured cards: Everything You Need to Know

By Jacqueline DeMarco
March 9, 2020

When you hit adolescence, your parents probably gave you a few quick money lessons. They may have taught you the importance of creating a budget or helped you open a legit savings account

For example, maybe they explained the difference between a debit and a credit card.  

But, did your parents tell you the difference between a secured credit card and a prepaid debit card? Probably not. 

Luckily, we’ve got you covered. Keep reading to learn what’s the difference between debit and secured credit cards. 

How a Secured Credit Card and Prepaid Debit Card Compare

Before we compare and contrast a secured card and a prepaid debit card, let’s first discuss what both cards are. 

A secured credit card allows you to borrow credit, yet requires collateral for you to do so. For example, in order to use a secured credit card, you must provide a monetary deposit to the card issuer. This amount acts as collateral for the lender in case you’re unable to pay for your charges.

A prepaid debit card is similar to a normal debit card as you don’t borrow money when you use it. Yet, with a regular debit card, your charges are deducted right out of your bank account. With a prepaid debit card, you load money onto the card before you use it. Any spending is then deducted from your available cash on the card. 

Now, let’s take a look at how secured credit cards and prepaid debit cards compare when it comes to these four criteria: building credit, initial cash deposits, the application process, and interest rates.

1. Credit Building Ability

  • Secured credit card

If you’re looking to build your credit history, a secured credit card can often help you do that. So, double-check with your card issuer to make sure your payments are being reported to the three main credit reporting agencies. This way you can build a history of positive credit habits. 

You may also want to speak with your card issuer about whether your secured credit card has a graduation component. A graduation component will allow you to evolve to a traditional credit card once you’ve proven to the issuer that you consistently make payments. 

  • Prepaid debit card

A prepaid debit card won’t help you build your credit history as you’re not using credit to make a purchase. But it may help you learn how to budget more effectively and curb your spending. That’s because you can only spend the amount of money you’ve loaded onto your card.

2. Initial Deposit

  • Secured credit card

When you get a secured credit card, you give the card issuer collateral before you use the card. This is essentially a downpayment in case you’re unable to repay your balance.

Like any other credit card, you’ll still need to pay your bill each month. But, if you fail to make a payment, the issuer can use your deposit to pay your bill. Plus, you can lose your deposit (aka the collateral) if you default on a payment. 

  • Prepaid debit card

As stated above, a prepaid debit card is not connected to your checking account. 

Therefore, you’re in charge of how much cash you want to initially put onto your card. You can then reload the card when you run out of money.

3. Card Application

  • Secured credit card

You can apply for and get a secured credit card at credit unions, banks, or credit card companies. During the application process, the financial institution will check your credit history. If your application is approved, you’ll then give the card holder a deposit. This amount is typically about $300 to $500. And, this amount is also generally your credit limit.

  • Prepaid debit card

Prepaid debit cards are available for purchase at select stores as well as online. There is no lengthy application process or credit check involved. Because you’re using your own preloaded cash, you won’t need a good credit score to qualify for a prepaid card. Using a prepaid card is a convenient alternative to carrying cash and it often helps you stick to a budget

4. Interest Rates & Fees

  • Secured credit card

When getting a secured credit card, it’s important to be aware of interest rates, as well as annual fees and processing fees.

  • Prepaid debit card

Unlike with credit cards, you won’t encounter interest with prepaid debit cards as you aren’t borrowing money. But, prepaid debit cards can have high fees, so make sure you do your research prior to choosing a card. 

Which card is right for you?

Depending on your needs, either a prepaid debit card or a secured credit card may be the right fit for you. 

In either case, consider your end goals before making a decision. For instance, if you need to give your credit score a boost, then a secured credit card might be a better fit for you as it can help you build a good credit history. 

Yet, if you need help sticking to a budget and want to steer clear of borrowing money, then a prepaid debit card might be the right call. 

Jacqueline DeMarco is a freelance writer based in Southern California who graduated from the University of California Irvine with a degree in Literary Journalism. She's worked with a variety of financial brands such as LendingTree, Fundera, and Northwestern Mutual, amongst others.

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