You haven’t exactly played well with banks and credit card issuers, leading many of them to shun you when applying for financial accounts. Alternatives are found in secured credit cards and prepaid cards, two financial products that may appear similar but function very differently.
The confusion between secured credit cards and prepaid debit cards is common and understandable. Both cater to a subset of consumers that lack the trustworthy credentials to access the traditional forms of these cards.
There are two main principles that govern secured credit cards and prepaid cards: 1) you cannot spend more than you have and 2) your previous history with banks and credit cards are irrelevant.
But, there are fundamental differences between the two types of cards.
Cash As Collateral
Directed towards the population with no or bad credit, a secured credit card requires that you deposit a certain amount of money that acts as collateral. Meanwhile, you use the secured credit card like a typical credit card – you are expected to make the minimum payment every month (not taken from the deposit balance).
Fall back on your payments and the lender will dip their hands into the cash collateral.
Secured credit cards will help users build their credit history since these accounts are reported to major credit bureaus.
The drawback from secured credit cards is most evident in the annual or monthly fees, which can vary greatly depending on the pricing structure. For example, the Applied Bank Visa Gold secured credit card carries a 9.99% APR with a $50 annual fee while the Applied Bank Platinum Zero Visa secured credit card charges no interest but has a $9.95 monthly fee.
Prospective secured credit card applicants should gauge their likelihood of carrying a balance to determine the least costly option.
The Pricey “Bank Account”
Prepaid debit card issuers won’t check your credit history or ChexSystems reports (banking equivalent of a credit reports). Anyone who’ve been denied checking accounts at banks would find a substitute in these prepaid cards.
In addition to a wide range of transactional fees, prepaid debit cards usually charge a monthly fee – some offer ways to waive it.
Common capabilities of prepaid debit cards include the ability to withdraw cash from ATMs, use online bill pay, and receive direct deposit. Folks without direct deposit can load prepaid cards through a transfer from a bank account or by purchasing “reload” cards at major retailers and drugstores. Codes from these reload cards can be entered online or by phone to add funds.
Some prepaid cards even have attractive properties such as linked high-yield savings accounts (e.g. Mango Prepaid MasterCard) or cash back on certain purchases (e.g. Vision Premier Visa Prepaid Card).
Prepaid card companies tout that there are no overdraft fees but the fact is that you cannot put this account into a negative balance – your spending is limited to the funds on the card.
Picking Your Card
Prepaid debit cards would be appropriate for you if you cannot open a bank account. Secured credit cards are for you if you cannot get a regular credit card.
So, the question to ask yourself would be: do I need a checking account (prepaid card) or do I need to rebuild my credit (secured credit card)?
They serve different applications, which is why the answer to that question will easily cut through confusion between the two.
It wouldn’t be weird to have both, though the total costs may be rather hefty.