Secured credit cards and prepaid debit cards are two financial products geared toward people with no credit or bad credit. However, only one will help you build good credit. Read on to learn the key differences between these two types of cards and which you should use if you have no credit history.
What is a secured credit card?
Secured credit cards are for people with no credit or bad credit who can’t qualify for traditional credit cards. When you are approved, you must put down a security deposit as collateral. The amount you pay up-front will be equivalent to your credit limit. Let’s say you put down $500 as a deposit; that means your credit limit will be $500.
You can then use your secured card like a regular card, making purchases with borrowed money and then paying it back (your deposit is not used to pay for purchases). While it may seem silly at first to only be extended credit by putting down money first, it allows you to show the creditor you are able to pay back what you borrow, making it an ideal first time credit card. With responsible use, the creditor may raise your credit limit without you having to put down more collateral. Eventually, you will get your deposit back and your credit should have improved. Then you can qualify for a credit card that doesn’t require an up-front deposit.
What is a prepaid debit card?
A prepaid debit card is another financial tool for people with no credit, but they work a little differently. They function like debit cards, except instead of being tied to a checking account, you reload money directly onto the card. As you swipe, your balance decreases. Once you’re out of money, you’re out, and it’s time to reload. These cards may be helpful if you don’t have a traditional debit card, but they are often riddled with fees, and they won’t help you build credit.
Why people with no credit history should choose secured cards
The key difference between these two types of cards for people with no credit history is that activity from secured cards is reported to the three major credit bureaus (Equifax, TransUnion and Experian), while activity from prepaid debit cards is not.
This means a prepaid debit card really only gives you spending benefits, such being able to make online purchases and not having to carry cash. Your usage of a prepaid debit card will not help you build credit because no activity is reported to credit bureaus. Your activity from a secured card, on the other hand, is reported to the bureaus. This means when you make smart moves, such as paying your balance in full, paying on time and keeping a low balance, your credit will get better — a benefit that is very important for people who want to eventually qualify for a mortgage or other loan.
» MORE: Credit cards for bad credit
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