Secured credit card vs. prepaid card
Secured credit cards and prepaid cards are both cash alternatives. But only secured credit cards can help you build credit when used responsibly. And there are differences when it comes to things like fees and funding.
Keep reading to learn more about the differences between secured cards and prepaid cards.
What you’ll learn:
-
Secured credit cards function like most other credit cards, except they require a refundable security deposit to open an account.
-
When used responsibly, cardholders can use secured credit cards to build credit.
-
Prepaid cards must be funded—and reloaded as money is spent—in order to use them.
-
Because prepaid cards don’t typically involve borrowing, they can’t be used to build credit.
What’s the difference between prepaid cards and secured credit cards?
Here’s a quick look at the similarities and differences between prepaid cards and secured credit cards:
|
Prepaid cards |
Secured credit cards |
|
|
Credit checks |
Not usually required |
Required during the application process |
|
Up-front costs |
Preloaded amount, plus any fees |
Security deposit to open a line of credit |
|
Spending limits |
Up to the card’s preloaded amount |
Credit line is typically the same or sometimes more than the security deposit |
|
Payments |
Used to load and reload the card |
Minimum monthly payment required |
|
Interest rates |
No interest |
Typically, variable APR; charges can be avoided or minimized by paying off the statement balance each month |
|
How it affects your credit |
Doesn’t build credit |
Can build credit with responsible use |
|
Protection against fraud |
Potentially less protection than credit cards |
Often offer standard credit card protections |
What is a prepaid card, and how does it work?
With a prepaid card, you pay money up front to fund the card in order to make purchases. Once the money on the card is spent, you have to add more to continue using it. These cards are also known as preloaded or reloadable cards.
You can generally get prepaid cards online, at banks, at credit unions or in stores. Keep in mind that some prepaid cards have fees that can deplete the money loaded onto the card. Common fees can include:
-
Activation fee
-
Transaction fee
-
Decline fee
-
Inactivity fee
-
Foreign transaction fee
Like credit cards, prepaid cards sometimes have expiration dates. And if a prepaid card is lost or stolen, you might not be protected.
Do prepaid cards affect credit scores?
Prepaid card issuers don’t report your credit history to the major credit bureaus—Equifax®, Experian® and TransUnion®—so they can’t help you build credit.
What is a secured credit card, and how does it work?
A secured credit card is a line of credit that requires a one-time security deposit to open. The security deposit is typically refundable and acts as collateral. Once the secured card account is open, you can use it as you would an unsecured credit card, which doesn’t require a deposit.
Some secured cards offer the ability to earn rewards. For example, the Capital One Quicksilver Secured card lets cardholders earn 1.5% cash back on every purchase.
Do secured credit cards affect credit scores?
Secured card issuers typically report your credit history to the major credit bureaus. So if you’re establishing or building your credit, using a secured card responsibly can help.
Should you get a secured credit card or a prepaid card?
Both secured credit cards and prepaid cards can be convenient ways to make everyday purchases. But if your goals involve building credit, you’ll need to use a card that involves borrowing from an issuer that reports your activity to credit bureaus. In most cases, only a secured card can do that.
Secured credit cards vs. prepaid cards FAQ
Here are the answers to some frequently asked questions about secured credit cards and prepaid cards.
What are some alternatives to prepaid and secured cards?
If you’re considering a prepaid card or a secured credit card because you have less-than-perfect credit, you should know that other types of credit cards also may be available. For example, Capital One has credit cards for fair credit.
Will a secured card raise my credit scores?
With responsible use, a secured card can be a tool to help improve your credit scores. Things like making monthly payments on time and using only the credit you need can help.
How long should I keep my secured credit card?
There’s no one-size-fits-all answer to how long you should keep your secured credit card account. It comes down to how useful the card is for you and whether closing it might negatively affect your credit.
You might consider keeping your secured card if you’re still building your credit. If your credit scores have improved enough, you can explore upgrading to an unsecured card that offers better rewards and a higher credit limit.
Can I use a prepaid card to establish credit?
No, prepaid cards can’t be used to establish credit. They aren’t linked to credit accounts, so there’s no activity to report to credit bureaus.
Key takeaways: Prepaid cards vs. secured credit cards
If you’re looking for the convenience of shopping with a card, both secured cards and prepaid cards can be handy. But if you’re looking to build your credit, a secured credit card might be a better option.
Are you new to credit or searching for your next credit card? Capital One can help:
-
See whether you’re pre-approved for credit cards without harming your credit scores.
-
If you’re looking to build your credit with responsible use, explore cards for people with fair credit.
-
Earn unlimited 1.5% cash back on every purchase, every day, with a cash back rewards card.
-
Monitor your credit report and score with CreditWise from Capital One. It’s free for everyone, and using it won’t hurt your credit.
