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The Difference between Secured and Prepaid Credit Cards

1 May, 2013 / by marketing

If you’re like many Canadians, and currently trying to pay down your debt and clean up your credit as fast as possible, you may have heard that getting a credit card is a great idea, and a great way to do it. But if you already have bad credit, the chances that a bank or other financial institution is going to want to give you credit is slim to none. So, your choices are a secured credit card, or a prepaid credit card. But what’s the difference?

A secured credit card is usually issued through a major bank or lender. You’ll put up collateral on the card, such as $1,000, and they’ll issue you credit – maybe $2,000 or even $5,000 until you can prove your credit-worthiness. It’s very much like putting a down payment on a home. While you have to put up something of yours upfront (the down payment,) you’ll get more than that in return on your loan. Of course also just like mortgages, credit cards need to be repaid promptly, but you’ll still be able to borrow what you need.

As long as you continue to pay off your secured credit card on time each and every month, or at least make the minimum payment, you will help improve your credit. That card, as long as the balance and payments made, will appear on your credit report and will affect your credit score; because you’re still borrowing money. Because of this, a secured credit card is the type you want to have if you’re trying to improve your credit.

A prepaid credit card on the other hand, is very different and can be offered by just about anyone. With these cards, you pay all of the money upfront and then use the card until that amount runs out. So if you put $1,000 on it, you’ll probably end up with $995 to spend, after the issuer takes their fee. That fee, which is usually charged per transaction, is how the issuer makes their money since they can’t charge you interest for money not borrowed.

Because prepaid credit cards don’t allow you to actually borrow money, using one won’t affect your credit either way. However, they are useful for those who have extremely poor credit and can’t get credit in any other form, but also want to use credit cards for things like online shopping and booking hotel rooms or car rentals.

When it comes time to use a credit card for the proper reasons, such as improving your credit, you’ll have a couple of options at your fingertips. The important one is that you know the difference between the two, and know which one will help you the most.