When you have less-than-stellar credit, you may need to apply for a secured credit card or a prepaid card rather than a traditional credit card. Each type of card is designed to take care of different types of credit card challenges. Only a secured card will help you rebuild your credit, though.
SIMILARITIES BETWEEN PREPAID AND SECURED CARDS
- Money up front
Both prepaid credit cards and secured credit cards require money up front from the consumer. The amount of money is different for each type of card. - Fees
There are sometimes application and transaction fees associated with these cards; shop around for the best terms. - Easy to get
Both of these cards are easy for consumers with bad credit to get once they find the card they want.
HOW THESE CARDS WORK
- Secured cards
Secured credit cards work the same as regular credit cards, except your own savings account acts as the collateral for your secured-card purchases. When you swipe your secured Visa or MasterCard, you are adding to the credit balance without changing your security deposit. For example, if your security deposit is $500 and you make a $200 purchase, your security deposit remains $500, while your credit balance is $200. You will receive a bill and need to pay that $200 amount. The credit card company will not use the security deposit money unless you are late or delinquent. Paying your secured-card bills on time can help you build up a positive credit history that may convince a bank to put you on a traditional credit card. - Prepaid cards
Prepaid debit cards work more like gift cards than credit cards. When you shop with a prepaid MasterCard, the purchase amount is subtracted from the amount of money you have paid up front. If you start with $200 and make a purchase for $20, your available balance for purchases (minus fees, if any) is $180. You can only spend the amount you’ve already deposited. This type of card is usually most useful when you want to make purchases at certain places that don’t deal in cash such as with online merchants.
Once you are eligible for a low-interest traditional credit card, you can settle your balance with the secured card and close the account. Your initial security balance will be returned.
