Secured Credit Cards and Prepaid Cards – How Do They Differ?
Secured Credit Cards and Prepaid Cards have always been a popular option for those with less than perfect credit, who are many times unable to get an unsecured credit card.
So what is the difference in these two credit card options? Which is the better choice for those looking to build or rebuild their credit?
Secured Credit Cards:
A secured credit card is one that is secured by money you will deposit into a bank account with the bank who is issuing the card. The credit limit on your card will be the amount you have on deposit. You will use the card like a traditional credit card, making purchases with the card, and making monthly payments.
Secured credit cards are normally preferable for those who wish to build or rebuild their credit. In showing the responsibility to stay within your credit limit and in making timely payments, you will begin to build your credit score.
One of the major factors in determining your credit score is your debt to credit ratio. One should never be using more than 30% to 40% of their available credit.
This applies to your secured credit card as well. If you have $5,000 on deposit with the bank you will have a $5,000 credit limit on your secured credit card. However, keeping your debt ratio at 40% or less means you should never be using more than $2,000 of your available credit line, at the very most. Using more than that can adversely affect your credit score.
One of the main things you want to take into consideration in applying for a Prepaid Card or a Secured Card is the charges involved in card membership.
Although one card may offer 0% interest, it may have a higher annual fee than another card, making it a more expensive card overall than one with a low-interest rate and a lower annual fee.
A prepaid card is one that you will load money onto for your shopping convenience. When your balance runs low, you will need to reload the card by adding additional funds onto it.
Most prepaid cards have no minimum deposit requirement and many will allow you to load as much as $5,000 to $10,000. Be sure to read the terms and conditions for each card before making the decision to apply.
Prepaid cards are popular not only with consumers who have bad credit, but have become extremely popular with those who shop online as well.
Many people do not want to enter the number of a traditional credit card online, particularly if they may have a high credit limit. They feel much safer having a prepaid card for their online shopping needs, loading the card with only enough to cover the cost of their purchases.
A prepaid card, however, will do little or nothing at all to help you build or rebuild your credit since it is not a credit card. These cards are funded using your own money.. therefore, no credit is being offered.