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Secured, Unsecured, Prepaid: What's the Difference?

Secured, Unsecured, Prepaid: What's the Difference?
Are you in the market for a credit card, but you're not quite sure about the difference between the various card options available? By now you've read a little about secured, unsecured, and prepaid cards, but how does each actually work? And more importantly, what's the difference between them?

By understanding the differences in the card options available to you, you can make a sound decision on which card is the best fit for your financial goals.

Secured Credit Cards

If you are trying to rebuild your credit or have not yet established a credit history, a secured card may be a good place to start. Secured credit cards requcredit ire you to put down a cash deposit as collateral, usually a minimum of $200 or $300. Typically the amount of your deposit (or a large percentage of it) becomes your credit limit. Some secured cards allow you to deposit as much as $5,000.

Where does your money go exactly? Your security deposit is placed in an FDIC-insured bank account, and it stays there as long as you have the card. The lone exception is that if you fail to pay your credit card bill and “charge off” the account, the amount owed gets deducted from your security deposit, your card gets shut down, and the amount left over is refunded to you. But if you are looking to rebuild credit and exhibit responsible use of your credit card, failing to pay on your account is the one scenario you will try to avoid.

If you keep your secured card paid off and decide at some point to cancel it yourself, the amount you deposited is refunded to you, often times with interest.

Unsecured Credit Cards

The unsecured credit card might sound intimidating or even a bit dangerous, but unsecured just means that there is no cash deposit or collateral required up front. Instead, the card works like a loan. You are granted a "grace period" and are billed at a later time for charges you make to the card. Companies that offer this card will check your credit history, and your credit limit will be determined by your credit score, among other factors. Typically, the higher your score, the higher your limit.

It’s very important to pay your bills for this type of card on time as well, as a late or missed payment will hurt your credit score and may increase your interest rates.

Prepaid Credit Cards

If your credit history is poor, a prepaid credit card is another good option for acquiring a card. But unlike secured and unsecured cards, prepaid cards often do not report your account history to credit bureaus, so this type of card may not help rebuild credit in some cases.

If improving your credit is important to you, you will want to be careful in choosing a card that offers reporting to credit bureaus. Some prepaid cards do so, while some do not.

There is no credit check required on most prepaid cards, so approval is virtually guaranteed. Once approved, you can pre-load your card using personal funds. You may also have to pay set-up charges for this type of card.

The Difference Between Prepaid & Secured

In a way, prepaid cards resemble secured cards to the average consumer, as both require that you deposit money to activate the card, and both typically offer spending limits equal to the amount of that deposit.

So what’s the difference, you ask?

For one, while prepaid cards rarely report your account history to credit bureaus, most secured cards report to all the major bureaus, making them a much better option for rebuilding credit. The other key difference is that as you charge purchases to a prepaid card, the amount you deposited simply runs out and there is no bill to pay; with a secured card, you will get a bill every month that needs to be paid by a certain due date. Prepaid cards deduct every charge you make from the amount you deposited, whereas secured cards keep the amount you deposited in a separate account and only draw from it if you fail to pay your bill.

While understanding the different types of credit cards may seem daunting, it’s important to know how these cards differ and how each can benefit a person with bad credit. This knowledge enables you to make an informed decision about what type of credit card is right for you and your financial future.