How Prepaid Debit Cards and Secured Credit Cards Are Different
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What’s the Difference Between Prepaid Debit Cards and Secured Credit Cards?
July 01, 2019
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What’s the Difference Between Prepaid Debit Cards and Secured Credit Cards?

For individuals with a poor or limited credit history, prepaid debit cards and secured credit cards are popular choices. However, just because both types of cards are easy to qualify for doesn’t mean they don’t have notable differences.

In fact, depending on your goals, the differences between these cards can have significant impacts on your business. For that reason, it’s important to understand how prepaid debit cards compare to secured credit cards — which we’ll explain in this post.

Once you understand the differences, you’ll know what each type of card is good for, so you can decide which one is the best fit for your business.

Prepaid Debit Cards vs. Secured Credit Cards

If you pursue a secured credit card, you’ll have to make a deposit to open your account. This financing will be used by your card issuer as collateral, and the amount of money you can borrow will depend on your deposit amount.

For example, let’s say you open an account for a secured card and deposit $500. Generally, you’ll be allowed to borrow some portion — say, 90 percent — of that deposit. If you fail to pay back what you borrowed, the card issuer will recoup their losses by taking your deposit.

In comparison, a prepaid debit card is more straightforward in that you simply load your money on the card and can make charges until that money is gone. Although most prepaid debit card options will generally have features that allow you to easily manage and track expenses, they work just like a preloaded gift card.

How These Cards Affect Your Credit Score:

If you want to build credit, and you’re deciding between a prepaid debit card and a secured credit card, you should choose a secured credit card. This is because, with a secured credit card, your payment activity will get reported to the credit bureaus, which will allow you to build up your credit history.

On the other hand, with a prepaid debit card, you’ll be spending money that you loaded on the card, so you won’t build credit.

How Business Owners Use Secured Credit Cards and Prepaid Debit Cards:

While a prepaid debit card won’t help you build or improve your credit history, that doesn’t mean it can’t be useful for some business owners.

For example, if you have several employees who need to make purchases on behalf of your business, prepaid debit cards will give you control over how those employees spend. Plus, just like most credit cards, there are plenty of prepaid debit cards that come with financial reporting features which make managing expenses far easier.

Of course, you can use secured credit cards t employee spending as well, but your spending limits will be dictated by your security deposit amount. Depending on the required minimum-security deposit, this can be inconvenient. On the other hand, a prepaid card gives you the flexibility to decide exactly how much money will be available for spending.

Still, unlike prepaid debit cards, there are some secured credit cards that come with rewards. Depending on the type of rewards offered and your spending patterns, this could make a secured credit card a better option for your business.

Conclusion: Consider Business Card Options

Ultimately, the difference between prepaid debit cards and secured credit cards comes down to credit history. One helps you build it and the other doesn’t. For that reason alone, a secured credit card is usually the better option for business owners who want to improve their credit score.

That said, if building your credit history isn’t a priority, the choice between a secured credit card and prepaid debit card comes down to personal preference. To that end, if building credit isn’t a priority, you should find and compare a few different cards of both types to see which have the features that are most important to you.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].