Unless you happen to be very credit savvy, it’s entirely possible that you are unaware of two interesting credit options that don’t get much attention. The first is a secured credit card, and the second is a prepaid debit card. In both cases, the user very likely has bad credit or has no credit history. They even operate in similar ways, although there is a huge difference between the two as far as building credit.
Secured card vs. prepaid debit: The basics
A secured credit card is a credit card, but with a unique function. Whereas most credit cards are unsecured — in that the issuer is relying on your promise and credit history to pay the card off in full at some point — a secured credit card has a backstop for the issuer. You actually put up a certain amount of money that the issuer will use in the event you default. They are covered against any losses. That amount of money serves as your credit limit.
A prepaid debit card allows you to electronically load it with a certain amount of money. Then you can use it to pay for transactions as you would a credit card, with each purchase debiting the card’s balance until it hits zero. At that point, unless you opt-in for overdraft protection, you cannot spend any more. It’s just like a credit limit.
Both are a great way to learn how to spend money responsibly. However, there are big differences that go beyond just simple usage. For starters, a prepaid debit card may have loads of fees attached to its usage. Those fees are not always disclosed clearly, so always check the fine print, or use Nerdwallet’s comparison tool. Visa, however, is beginning to issue a Best Practices protocol for disclosure. There are fees for secured credit cards, also, but the law requires clear disclosure of those fees.
What about building credit, scoring rewards?
The big difference is that using a secured credit card will build your credit while using a prepaid debit card will not. Credit bureaus look at how you spend money, and how you pay it back. It’s about credit – using the bank’s money to buy something with a promise to pay later.
A prepaid debit card is a cash-centered transactional device. You aren’t borrowing a bank’s money. You are using your money to load up a card, and then spend it down. Some people may get tricked into thinking it will help build credit, because most prepaid debit cards have a Visa or MasterCard logo. That logo simply indicates that one of those two companies is processing the flow of money from each transaction. That’s all it is.
One other difference involves rewards. A few prepaid debit cards offer very modest loyalty rewards. Credit cards, however, offer rewards for their use. Secured cards can also be somewhat limited in their reward offers. However, after awhile, you can graduate to a regular credit card that does offer rewards. There is no such graduation with prepaid debit cards.
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