The Prepaid Debit Cards and the Secured Credit Cards, in both of them the funds have to be deposited in advance before using them. Then what is the difference between the two cards. Here are some of the distinct features of the two cards.
Prepaid Debit Cards - Prepaid debit cards are successor of the secured credit cards. Prepaid debit cards, have the Mastercard or Visa logo on them and are accepted worldwide. Much like the bank debit cards they use up funds from the account of an individual when used to do purchasing, they do not require monthly payments and do not charge interest.
The major difference is of eligibility for getting the card and how much it costs to use the card. Prepaid debit cards are not concerned with the eligibility of the card holder. Most of the time issuers do not verify employment, credit, addresses or even legal residency. Because of this reason these types of cards very popular with immigrant workers in the United States illegally.
Debit cards are also more fees concentrated than traditional secured credit cards. In this card the fees is usually measured by transaction. Other fees include, loading fees, transfer fees, check deposit fees, annual fees and more. These fees people have to pay for convenience and anonymity. These cards will not report cardholder transactions to the credit bureaus, which is not ideal for those who are trying to establish credit.
In our society it is almost impossible to live without some type of visa or Mastercard, debit cards fill this void. They offer a "de facto" i.e. actual banking system for those unable to qualify normally. They offer direct deposits for paychecks and many other features to a segment of society that traditional banks have left out in the cold. All in all, prepaid debit cards are pretty convenient for some people.
Secured Credit Cards – have been designed for the people with bad credit. Most people that apply for these types of credit cards do so to build or rebuild their credit. Otherwise the advantages are the same like a regular credit card. Most prepaid cards are clearly marked as debit cards with outrageous designs and colors.
The price you pay for rebuilding your credit is interest. But this is the interest which you are paying on your own money! Secured cards carry pretty steep interest rate, usually around 15% whereas prepaid debit cards do not carry any fees. Secured credit cards are not usually "re-loadable". Meaning, once you make your initial deposit this becomes your "credit limit". Your payments will bring down the balance giving you more purchasing power.
Secured credit cards report to the credit bureaus exactly the same way a regular credit card does. Creditors reviewing your credit for purchases have no idea if your credit card is secured or not. Another thing to see is that most people will fund their cards with money that they intend to use immediately. Meaning they send in $500 and expect to be able to go out and spend that $500 immediately on receipt of their card. This is not good borrowing practices as this will bring down your credit score.
Credit cards are considered as liabilities on your credit bureau once you borrow over half of your credit limit. The credit bureaus see this as a sign of credit dependency and discount your credit score 35%. When this happens you are hurting your credit, paying regular credit card fees, paying interest on your money and carrying around a maxed out credit card.
There is one fruitful advice for the borrowers is to save up enough money so that your initial deposit is large enough to show a decent credit limit on your credit bureau, around $1000. Then do not touch it. It will only cost you the price of the annual fee to keep it in the bank. Most people feel the need to charge something on the card to "prove" they can pay it back. This assumption could not be further than the truth. Credit bureaus do not show monthly payments; they only show the months you have had the account open and any months that you have been offender.
When a future creditor sees your $1000 open line of credit, higher credit scores and the financial restraint your report is demonstrating you will be much more likely to get the loan easily. Secured credit cards can significantly help you rebuild your credit and have a positive impact on you overall credit score. Unfortunately most people use them incorrectly and end up hurting their credit more than it was before getting the card.