Secured Credit Card vs. Prepaid Credit Card: Which Is Right for You?

• A secured credit card can help build or rebuild your credit history, often for a low annual fee or no annual fee.
• KOHO is one of the only prepaid credit cards with a credit building feature.
• Prepaid credit cards don’t charge interest, but they have one major drawback: they won’t help your credit score.

Using a credit card to make bill payments, shop online and track purchases is quick and convenient. While debit cards can help with many of these tasks, credit cards can often be more rewarding. But, for some, accessing credit can be challenging.

Whether you have a thin credit profile, as is the case for many young adults or new residents of Canada, or you have a poor credit history, you may not meet the eligibility requirements for standard unsecured credit cards.

That leaves you with two options: secured credit cards and prepaid cards, which both have high approval rates. However, these cards serve different purposes. Learn the difference between the cards to ensure you select the one that fits your lifestyle.

What is a secured credit card?

A secured credit card is similar to a traditional (meaning unsecured) credit card, apart from requiring you to make a deposit. The deposit is one of the only eligibility requirements for this type of card as it alleviates some of the risks for the lender. It also determines the credit limit, which cardholders cannot exceed.

The issuer holds the deposit as collateral against any potential losses and should return it upon cancelling the card if the account is in good standing.

You will receive a statement at the end of each monthly billing cycle and accrue interest on any unpaid balances. The expectation is that as you keep up with payments, the issuer reports the positive information to the two main credit bureaus in Canada, Equifax and TransUnion, improving your credit score.

Who can benefit from a secured credit card?

This type of card is ideal for newcomers to Canada, students and those with poor credit history, including those with past bankruptcies. A secured credit card can help build or rebuild cardholders’ credit scores, improving eligibility for better products in the future.

What is a prepaid credit card?

A prepaid credit card, also known as a reloadable credit card, allows the user to make purchases and pay bills like a traditional credit card; however, there are a few crucial differences:

• The balance. You must load funds to the account instead of borrowing money from a lender. Each transaction reduces the balance, and you can never spend more than the funds you loaded. Once the balance reaches $0, you must reload the card before making any further transactions.
• Interest rates. You cannot buy now and pay later, as the money belongs to you already. Therefore, no interest charges apply.
• Credit building. Unfortunately, prepaid cards do not report credit history to the credit bureaus since cardholders do not borrow money, and there is no credit risk associated with the accounts. There is one exception to this rule, however — the Credit Building feature by KOHO. For a budget-friendly fee of $7 a month, cardholders can subscribe to the service to help improve their credit scores.

Payment networks like Visa, Mastercard or American Express typically back prepaid cards and may provide additional security features and fraud protection. Some cards will also offer rewards or cash back.

Who can benefit from a prepaid credit card?

This type of card is great for people who need to set spending boundaries. A prepaid card can help you take a disciplined approach to money management as you work toward paying off debt on another credit card, for example. It can also help you budget, avoid overspending and establish responsible spending habits.

A comparison of secured and prepaid credit cards

Here is a side-by-side comparison of the two types of cards:

Which is the right choice for you?

Choosing the best credit card for your lifestyle will depend on individual circumstances, including your financial situation, credit history and overall needs.

A prepaid credit card will not help improve your credit score unless you have signed up for an additional service. However, these types of cards can be useful to shop online and pay bills without ever worrying about overspending. Not only that, but some cards also offer cash back for making everyday purchases.

A secured credit card can help improve your credit score with a deposit of only a few hundred dollars and good payment practices. This type of card can set you on the right track toward a better financial future where you can access top-tier rewards credit cards or low mortgage rates with time.

Rates, product information, and reward estimates are subject to change at any time and do not constitute financial advice. This post was not sponsored. The views and opinions expressed in this review are purely those of RATESDOTCA. Information in this article is accurate as of the date of this posting, May 17, 2021. Read our full disclaimer.