As the financial landscape becomes more and more complex, consumers have more choices than ever before. And while that can be a good thing, it’s important to understand the options available when making important decisions. That’s especially true when it comes to the types of credit cards available. Here’s a breakdown of what makes secured, unsecured, and prepaid cards different from each other.
Secured Credit Cards
For consumers who are new to credit, or those who need to rebuild credit following financial hardship, a secured credit card can be a helpful step in that process. To obtain a secured credit card, a consumer must make a deposit into a savings account; that amount becomes the amount of available credit on the card. If the consumer doesn’t make timely payments on the card, the debt is covered by the money in the account. Missed payments will also be noted on the borrower’s credit report and can cause a drop in the credit score; precisely what the borrower is trying to avoid.
It’s important to note that some secured credit cards can be more costly than they are worth. In addition to an annual fee, some may also charge a monthly fee, or require the consumer to buy monthly ‘insurance’ for the card. If those stipulations apply, skip that card and look for one that doesn’t have fees to diminish the amount of available credit. As with all financial transactions, it’s important to read the fine print and understand all the details before committing to a secured credit card.
Unsecured Credit Cards
These are what most consumers think of when they think of credit cards. A borrower applies for a card, and after their credit is reviewed, they are either rejected or approved for a credit card with a pre-determined credit limit, which could be anywhere from a few hundred to many thousands of dollars. There is no deposit requirement; the only thing required of the borrower is the promise to make payments on time, every month. The terms of unsecured credit cards vary widely, and may include an annual fee, late charges and overlimit fees.
While a credit card is an important financial tool to have available for things like renting a car or booking an airline flight, it can also lead to overspending and financial hardship if not used carefully. Additionally, consumers must be mindful of their credit cards’ interest rates, as well as fees associated with the cards.
Prepaid cards are general use cards “loaded” with a cash deposit. Once the consumer spends the deposited amount, the card is useless until they reload it with more cash. Consumers can use prepaid cards like credit cards to make purchases and pay bills both in-store and online.
At first glance, it may sound like prepaid cards are the same as secured credit cards, because the amount one can spend is based on a corresponding deposit. While similar, there is one very important difference between secured credit cards and prepaid cards: using prepaid cards does not affect a consumer’s credit in any way, positive or negative. Depending on someone’s ultimate financial goals, this can be a good or a bad thing. If the goal is to establish or rebuild credit, a prepaid card is not the best choice. However, if a consumer knows they have a problem controlling their use of a credit card, a prepaid card allows the convenience and security of using a card to shop, without the risk of overspending.
As with secured and unsecured cards, prepaid cards may have fees associated with them. So it’s a good idea to shop around to find the best deal.
Understanding the differences between secured, unsecured, and prepaid cards will help you make smart financial decisions.