secured credit cards

Secured Credit Card vs. Prepaid Debit Card: What’s the Difference?


by

24 January,2012

When you are trying to rebuild credit, finding the means to help you establish a better credit history can be tough. It’s hard to qualify for loans, and even some credit card companies are reluctant to give you a line of credit. What you need is a  secured loan from a creditor that will report your information to the credit bureaus.

Secured Credit Card or Prepaid Debit Card?

When deciding what to do to repair your credit, a secured credit card can go a long way to help. Such a credit card is easy to get a approved for because you have to provide money in an account as collateral. That means that if you don’t pay, the creditor can seize the money you have put down as security. However, as you make payments on your secured credit card, your history is reported to the bureaus, and your credit score begins to improve.

It’s important, though, not to confuse a secured credit card with a prepaid debit card, though. There is some confusion about these two financial products because  they appear similar. You put cash on a prepaid debit card, and there is usually a credit card company logo, such as MasterCard or Visa, on the card. And, thanks to the latest offering from Suze Orman, the confusion has only intensified. Even though data from Orman’s prepaid debit card is being reported to the TransUnion credit bureau, it won’t affect credit scores.

So, while you might be able to avoid interest charges with a prepaid debit card, and enjoy some of the convenience associated with swiping plastic, a prepaid debit card will not help you improve your credit score. You will need to use a secured credit card if you want to repair your credit.

Make Sure You are Using a Secured Credit Card

As you work to rebuild your credit, make sure you are using a secured credit card. Before you sign on the dotted line, ask the issuer these questions:

  • Is my money going into an account to be used as collateral for my line of credit?
  • Will you report my payments to the credit bureaus?
  • Can I convert this card to an unsecured card later?

If the answer to the above questions is “no,” there is a good chance that you are dealing with a prepaid debit card. This means that you will simply be using an (expensive) alternative to a checking account, rather than actually using a credit card that will help you rebuild your credit. If your main goal is to repair your credit, a prepaid debit card is useless, and a waste of time and the money you will pay in fees.

Make sure that your card will report to the credit bureaus, and try to use a secured credit card that will convert to an unsecured card later. This will be even better for your credit score down the road, and it will help you as you work to increase your line of credit and re-establish your financial reputation.