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Secured Credit Cards vs. Prepaid Debit Cards

Don’t worry – you’re not the only one confused by the many types of plastic cards. For the most part, people understand the difference between a debit card and a credit card. A debit card is a card that is connected to a bank account much like an ATM card. A credit card on the other hand, allows you to use credit (or borrowed money) based on your credit history. Ok, simple enough. But, what is a secured credit card and how does it differ from a prepaid debit card?

A secured credit card is a credit card in which a deposit is used as collateral for the credit that is extended to the borrower. For example, if a secured credit card requires a minimum deposit of $300, the issuing bank may offer you an initial credit of $300 or more. In most cases, the credit limit will at least match the amount of the minimum deposit.

The differences between a secured credit card and a prepaid debit card:

  • A secured credit card’s approval is partially based on your credit history, whereas the approval for a prepaid debit card is not based on a credit check.
  • With a secured credit card account, your credit is usually reported to the major credit bureaus, whereas a prepaid debit card may not be reported. This is dependent on which prepaid debit card you apply for.
  • A secured credit card account requires that you make a minimum deposit to open the account. The amount of money that you deposit upfront usually determines the amount of credit line that is offered to you. For prepaid debit cards, it works a little bit differently. Because credit is not a factor in the approval process of prepaid debit cards, credit is not extended to you. Instead, your available spending limit is set by the amount of money you have deposited or loaded onto your prepaid debit account.
  • Depending on the secured card issuer, interest may be paid on your deposit. A prepaid debit account not offer interest on your loaded funds.
  • A secured credit card does not allow direct deposit, while it does allow automatic payments. Most prepaid card issuers do give you the option of direct deposit.
  • A secured credit card charges interest just like a regular credit card. A prepaid debit card does not charge any interest.

Unfortunately, both types of cards come with fees. However, certain fees can be avoided with prepaid debit cards if you set up direct deposit.

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