Prepaid debit cards vs. secured credit cards

Prepaid debit cards vs. secured credit cards

When it comes to improving your credit, there are plenty of wrong answers but no single right answer, and as such, people with less-than-perfect credit try a number of different methods to work toward this particular goal. Not infrequently, secured credit cards find themselves cited as potential building blocks that can be used to develop a good consumer credit profile. 

"Prepaid debit and secured credit cards have notable differences, but both can be useful."

Prepaid debit cards are sometimes confused with secured credit, because of their primary similarity - both require the user to deposit money from a bank account or via another verifiable medium, including cash. Both have useful applications, but it's important to break down the distinct differences between the two card types, illustrate the situations in which they can be valuable and note how alternative credit can play a role in all of this. 

The primary similarity 
When a bank, creditor or other financial institution issues a prepaid debit card, they're taking on hardly any risk, because they have the individual's deposit, according to NerdWallet, which can be anything from $100 to $2,000 or more. Along similar lines, consumers must make a deposit to use a secured credit card, so that there's no possibility of maxing out and leaving the issuer high and dry. 

After that, though, the similarities between the two end. Prepaid debit cards aren't tracked by FICO or the Big Three credit bureaus (though alternative credit data platforms like PRBC can monitor them - more on that later), whereas the balances and repayment histories of secured credit cards find their way into all major credit reports and scoring models. 

Benefits of secured credit 
Secured credit cards are often recommended to individuals who have credit that is somewhat problematic or is largely nonexistent. You can only spend as much money as you deposited initially, and it has to be paid back (at least partially) each month just like any other credit card balance. If you make regular timely payments as much above the minimum amount as you possibly can, your credit score will improve. 

It's worth noting that this won't happen instantaneously, and may take several months or even a year. Patience, diligence and frugality are essential to the process.

Making the most of prepaid debit
Although prepaid debit cards don't count toward the reconstruction of your traditional credit scores, this doesn't mean there aren't situations in which they can be useful. For example, as The Balance pointed out, many of them offer rewards for continued use.

In many situations, these perks come in the form of rewards points or cash-back refunds. Such benefits are typically accrued when users hit certain purchase thresholds, spend in certain specific places (like a retail outlet partnered with the credit issuer) or put debit charges toward a specific product category, like groceries, gasoline, plane tickets and so on. Additionally, some prepaid debit cards offer purchase protections, no ATM fees or faster direct deposits.

Last but not least, responsible use of a prepaid debit card by PRBC members is added to their alternative credit profile, which can help benefit their overall financial well-being in the long run. Contact us today to learn more!