Having bad credit is not a death sentence, financially speaking. And if you have bad credit is doesn’t mean you’re now relegated to paying cash for everything from now on. Even if your credit doesn’t currently allow you to to take out a traditional credit card or checking account and debit card, there are options. And two of the most popular ones are secured credit cards, where a person puts down a cash deposit and is then extended a line of credit; and prepaid cards, in which cash is pre-loaded onto a card and essentially functions like a debit card.
There’s a variety of reasons to get prepaid or secured credit cards: you want to buy something online but don’t have a credit or debit card; you want to begin direct deposit or write checks without a bank account; or you simply don’t want to carry around a lot of cash all of the time.
So which is better? A prepaid or secured credit card? When deciding between prepaid or secured cards it helps to remember both come with distinct advantages and disadvantages, and picking which one is right for your situation depends on what you want to accomplish.
Scenario: You want to improve your credit
You might sometimes hear people refer to prepaid cards as prepaid “credit” cards, but that is a misnomer. When picking between prepaid or secured cards, perhaps the biggest difference between the two to consider is that a secured credit card “secures” credit with a cash deposit, while prepaid cards contain just a cash balance and provide zero credit. If you’re attempting to rebuild credit or take out an unsecured card, a prepaid is not going to help you.
That’s because a prepaid card essentially functions like a little plastic bank, a consolidated place to store your money. What they do not do is extend you credit. To improve credit you have to obtain credit and then pay it back. If improving your credit score is the goal, a secured card is the way to go.
Scenario: You want to make purchases online when you’re not trusted with credit yet
Let’s say you need to make a purchase online, or book a hotel room, or even just pay a bill that can’t be settled with cash. Let’s also say you’re a teenager or are otherwise just learning about finances and haven’t been entrusted with a credit line.
In that case, you’re going to have to go with a prepaid card. A prepaid card will allow you to make purchases and pay bills online with only a simple cash deposit. Of course, there’s still likely going to be fees, but it provides an option for literally anyone to pay bills or make purchases online.
Prepaids can only be used to spend as much money as was loaded onto them, meaning that they are ideal as instruments for navigating the world of online commerce and bill paying, while not giving too much leeway in terms of flexible credit.
Scenario: You want to avoid check-cashing fees
It’s no secret that check-cashing storefronts charge an arm and a leg for their services. This is where prepaids can be advantageous. They often prove to be better options than one-offs at check cashing stores, and although the fees can still be high there are some relatively low-fee prepaid options out there.
Prepaid cards allow a person without a checking account a way to directly deposit a check without utilizing a check-cashing establishment, a feature that sets them apart from most secured cards. Prepaids offer a lot of the advantages of having a bank account without having a bank account: deposit checks, withdraw money from an ATM, even write checks. Of course, these activities come with fees, but they do provide an alternative if you loathe opening a checking account for whatever reason.
Scenario: You want to spend money without spending (extra) money
Perhaps the biggest drawback of a prepaid card is that it is a credit-less “credit” card, but one that usually comes with monthly maintenance fees and/or purchase fees. Certainly you can use tricks to get those fees down to a negligible amount. But with a prepaid, even if it’s just a tiny fee, you’re still eating right into your money without improving your credit score.
While secured credit cards aren’t exactly offering the best rates compared to traditional credit cards, making purchases on one and then paying the balance at least helps you get your credit score back up. Rebuilding credit isn’t always easy, but secured cards can help you start.
Scenario: You want extra access to extra money
It’s implicit in the term “credit,” but as a secured credit card offers advances and a prepaid is limited by the cash deposited into it, if you need a temporary advance, a secured is the only feasible option. The cash deposit necessary to open a secured card provides the safety net, so to speak, which can be used to pay down the balance.
If you’re looking for a brief, quick loan, a secured card provides that option where a prepaid does not.
So which is better?
To be sure, both prepaids and secured cards should be viewed as temporary stepping stones on your path to improving your financial lot in life. Both carry fees and high APRs that cards offered to people with better credit do not, and likewise should not be relied upon as a permanent solution to make purchases online or otherwise engage in activities that necessitate a card in lieu of cash.
A prepaid can certainly fill that need for a “plastic bank” at the most base level. But one key difference separates it from a secured card, and it’s more than enough to make a secured card the better option.
Secured cards begin rebuilding your credit. This is essential if you ever want to improve your credit score. Of course, they require being a little more careful: secured cards are extending you credit, and thus provide the opportunity to lure you back into bad financial habits.
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But they also provide a way to get back onto your feet, financially speaking, while maintaining a safety net in the form of the cash deposits necessary to open one.
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