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Should you get a secured credit card or prepaid debit card?

Tuesday, June 12, 2012 at 5:15:00 PM

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If your credit score has taken a tumble in recent years and you find yourself unable to qualify for most of the accounts you may want, you might be faced with a decision between a secured credit card and a prepaid debit card.

But when you examine a number of credit card applications and offers for prepaid cards, you might wonder what the differences are between these types of cards, and which will work best for you?

How prepaid debit cards work

As you might imagine, a prepaid debit card works in much the same way as a traditional debit card: You put a certain amount of money into an account, and then every time you use it, the amount you can spend on the card decreases until you put more money into it.

But the difference between a prepaid account and traditional debit card account is in the fees you might face. While a traditional checking account associated with a debit card might have a few account maintenance fees, it might not charge you for things like using the card to withdraw money from an ATM, while a prepaid card might.

When weighing the cost of these accounts, it's important o keep your current debit use in mind to see how much it might end up costing you.

How secured credit cards work

As with prepaid cards, you will be required to make a deposit of some kind - usually it's roughly a few hundred dollars - to begin using the account, but unlike a prepaid card, that money doesn't go away every time you use the card. Instead, it's used to establish your new account's credit limit.

Therefore, you can use a secured credit card as you would any other credit card, but you'll have to keep in mind that the limit on the account is significantly lower, and therefore it can be easier to max it out. In addition, secured cards usually come with higher interest rates and annual fees than you might have been used to on your old credit cards, meaning that keeping your balance low will be essential to making the account affordable.

You should also make sure your new secured account reports to the credit bureaus, as this is important for rebuilding your credit score, which in turn will grant you access to more beneficial credit card offers in the future.

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