Both provide the same freedom as a credit card, but without the risk of falling into debt.
Credit cards are one of the best ways to build credit, and when used responsibly, can provide flexibility in your path to financial stability. While there are all sorts of benefits that come with owning a credit card, there are also a handful of downsides. Whether you’re having trouble getting approved or just want to avoid the liability, there are a number of other financial products that serve a similar purpose.
Secured credit cards and prepaid debit cards are two of the most popular and available alternatives to credit cards. Both provide the same freedom as a credit card, but without the risk of falling into debt. They can be used to build credit, pay for everyday expenses or even as a stepping stone to an unsecured credit card. Here’s everything you need to know about secured credit cards and prepaid debit cards.
What is a secured credit card?
Secured credit cards offer the advantages of an unsecured credit card even if you have poor credit. The main difference between secured and unsecured credit cards is that secured cards require a deposit that serves as your credit limit.
Unsecured credit card issuers rely on your credit history as assurance that you’ll pay off your purchases, whereas with secured cards, your deposit acts as collateral. Secured credit cards are easier to be approved for — especially for those with limited or poor credit.
See our list of the top secured cards.
How do secured credit cards work?
You can use a secured credit cards anywhere that accepts unsecured cards — online or in person — and you’ll receive a monthly statement with your balance. You’ll see a required minimum payment every month, but you’ll pay interest on any outstanding balance. Making timely payments and staying within your credit limit will help you build up your credit score over time.
When are secured cards better than prepaid debit cards?
Secured credit cards allow you to use the lender’s money on credit with the promise to pay it back later. The greatest advantage secured cards have over prepaid cards is that it helps you build your credit score as you use it.
Secured credit cards also offer more flexibility in your spending, and some offer rewards programs, benefits and other perks that aren’t available on prepaid debit cards.
Pros and cons of secured credit cards
Pros
- High approval rates
- Build credit with no risk of debt
- Can be used anywhere
- Refundable deposit that may earn interest
- Flexibility in spending
Cons
- Upfront deposit
- Better cards may have lower fees
- Low credit limits
- Lack of rewards programs
- Higher APR
- Approval is not guaranteed
Best secured credit cards
| Name | US Annual Fee | Min credit limit | US APR for Purchases ( Purchase | Call to action |
|---|---|---|---|---|
| OpenSky® Secured Visa® Credit Card | $35 | $200 | 18.64% variable | Go to site More info |
| Discover it® Secured Credit Card | $0 | $200 | 24.49% variable | More info |
| Capital One Secured Mastercard | $0 | $200 | 24.99% variable | More info |
| DCU Visa® Platinum Secured Credit Card | $0 | $5 | 13.00% variable | More info |
| State Department Federal Credit Union (SDFCU) Savings Secured Visa Platinum Card | $0 | $250 | 13.24% variable | More info |
What is a prepaid debit card?
Prepaid debit cards are not linked to your bank account. Instead, you load money onto the card and once it runs out, you can either load more or get a new card. There are no credit limits, monthly bills or interest charges like a credit card, but you’ll still be able to use it anywhere you’d use a standard debit card.
How do prepaid debit cards work?
Unlike standard debit cards and credit cards, you won’t need to go through a financial institution to get a prepaid debit card. Prepaid debit cards can be purchased at grocery stores, pharmacies, corner stores and a handful of other locations, making them much easier to get. Once you’ve obtained a card, there are a number of ways you can load money onto it:
- Through a financial institution via cash, check or transfer.
- Direct-deposit paychecks onto your card.
- Online: PayPal, Interac or bank transfer.
- Reload it at a retail store like Walmart or Walgreens.
- Buy a reload card such as Vanilla, Green Dot or MoneyPak.
Once your card is loaded, you can use it to make purchases anywhere you’d use a normal debit card. This includes goods and services at retail locations and even online bill payment for some cards.
Pros and cons of prepaid debit cards
Pros
- Controlled spending
- No overdraft fees
- No credit check required
- No bank account needed
- No interest charges
- Keeps your money safe
Cons
- Doesn’t build credit
- No rewards programs or benefits
- Undisclosed service charges
- Activation, withdrawal and deposit fees
- Limited online purchases
- Less security if lost or stolen
When are prepaid debit cards better than secured credit cards?
Prepaid debit cards and secured credit cards are very similar in that they both provide a means to manage your spending. While secured credit cards offer more flexibility in your spending, they may promote bad habits since you aren’t actually spending your own money. Prepaid debit cards encourage responsible spending and budgeting, and offer a secure way to manage your cash without a bank account.
Best prepaid debit cards
Secured credit cards vs. prepaid debit cards
While secured credit cards and prepaid debit cards may seem very similar in theory, there are actually several major differences. Here are a few of the main features that separate the two:
| Secured credit cards | Prepaid debit cards |
|---|---|
| Deposit is collateral and your spending limit | Deposit is your spending limit |
| Annual, transactional and maintenance fees | Activation, withdrawal and deposit fees |
| Interest charges on monthly balance | Monthly service charges |
| Build credit as you use the card | Doesn’t build credit |
| Funding through bank account | Multiple funding options |
| Can be used almost anywhere | Limited online use and access |
| Interest and fees on cash advances | ATM balance inquiry fees |
| Rewards programs and card benefits | Guaranteed approval |
| Only available through financial institutions | No bank account required |
Bottom line
There are a handful of financial products that can help you better control your spending and budgeting, but secured credit cards and prepaid debit cards are among the best. If you’re looking to improve your credit, secured credit cards are the best choice. However, if you’re just looking for a way to manage your finances, prepaid debit cards offer most of the benefits of a standard debit card without a bank account.
As with any major financial decision, you should always weigh your options to find a product that best suits your needs. Explore secured credit card or prepaid debit card options, then apply for the card that’s right for you.
