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Prepaid cards vs. secured credit cards

If you’re working on your credit and currently don’t qualify for a traditional credit card, you still have other options, with the most popular being prepaid cards and secured credit cards. Many consumers confuse the two, and while they do share some similarities, they are completely separate products. In this article, we explore those similarities, as well as the differences that set prepaid cards apart from secured credit cards.

Secured credit cards

With a secured credit card, the user makes a monetary deposit, which is used as collateral, and thus “securing” this type of debt. Normally, credit cards are unsecured debts, because no deposit is made and there is no collateral—the only thing at risk is the user’s credit.

Once you make a deposit, you are then given a line of credit, just like any other credit card. This credit line can vary depending the specific secured card you opened up and your credit history, but oftentimes, these credit lines are quite low. Just like with regular credit cards, you’ll receive monthly statements and you’ll be required to make payments. You won’t receive your deposit back until you close out your account and your balance is paid off in full. For some people, this can be risky.

Your payment activity on a secured credit card is sent to the credit reporting bureaus, and as such, your credit score is affected. For people looking to build up their credit score, responsible use of a secured credit card can sometimes be a good place to start, but not always. If you don’t think you’re financially responsible yet to use a credit card, you don’t only put your monetary deposit at risk, but your credit score can end up going down, rather than improving.

Prepaid cards

Prepaid cards, on the other hand, have no effect on your credit score whatsoever. For many consumers, this is the great thing about prepaid cards, especially if they’ve had significant credit card debt troubles in the past. There is no borrowing any money when it comes to prepaid cards, so there are no minimum required payments or bill deadlines to worry about. Many consumers find that prepaid cards are much simpler to manage and are a stress-free way to have a credit card.

Similarly to secured cards, prepaid cards require that users make a monetary deposit. However, this is another way that the two differ: the monetary deposit you make on your prepaid card is not collateral, but in fact, is what you can spend. This often gives users the opportunity to use their cards for much larger purchases, due to the fact that secured credit cards usually impose low limits. For example, if you’re planning on booking a vacation online, you’ll need a credit card. If you have a secured credit card, your limit may not be enough to book the entire thing. If you have a prepaid card, you can load the money you need onto the card and book your entire trip. And the best part of all? You won’t be in debt or owe any of that money back, because the money you spent was yours and not borrowed.

Would you like more information about opening up a prepaid card? Learn more about the prepaid cars we offer at J.G. Wentworth by visiting our prepaid card section today.