Some people prefer buying items with a card instead of cash. Plastic makes it easier to track expenses since you can refer to a statement. It’s also safer than cash, which can’t be replaced if lost or stolen. If you normally pay with cash and you’re looking for a better way to manage your purchases, you might go back and forth between getting a prepaid credit card or a secured credit card. You may wonder: is one better than the other? There is no right answer. In all honesty, it depends on your needs and what you hope to accomplish. To make an informed decision, you need to understand the differences between the two types of cards. 1. Prepaid Credit CardYou can pick up a prepaid credit card from just about any retail store from gas stations to grocery stores. There’s usually a small fee to activate a card. Once your account is up and running, you can deposit money directly onto the card. There’s even the option of having your paychecks direct deposited onto a prepaid card. Prepaid cards are a useful tool if you don't have credit, or if you're looking for a simpler way to pay with cash. A prepaid card isn't a credit card, so you can only spend what you deposit on the card, and there's no risk of debt. Since it's not a credit card, there's no application and you can’t be denied. You might get a prepaid card if you don't have a bank account, or if you use the envelope system to manage your finances. For example, you can deposit cash on a prepaid card for gas, groceries and entertainment. This way, you can reduce your number of bank debit card swipes throughout the month. A prepaid card is convenient. Just know that it doesn't build a credit history. These accounts are not tied to your credit and the issuer doesn’t report to the bureaus. To build credit, you have to apply for a credit card. 2. Secured Credit CardsIt takes credit to build credit. However, getting approved for your first credit card can be an uphill challenge if you don’t have a prior credit history. Secured credit cards make it easier to build a credit history from scratch These credit cards are different from unsecured cards because they require a security deposit starting as low as $250. Paying to build your credit might leave a bad taste in your mouth. But if you’ve been turned down for unsecured credit cards, a secured card is the next best thing. Some secured cards feature annual fees, monthly maintenance fees and set up fees, so make sure you read the fine print and compare fees before applying. A secured credit card is not a prepaid card. Therefore, the security deposit isn’t prepayment for future charges. The deposit acts as collateral. It’s kept in an interest bearing account and the bank only touches this money if your account becomes delinquent. You'll receive a monthly statement—just like with any other type of credit card—and you're still required to make a minimum payment. The bank issuing your secured credit card will report your activity to the credit bureau's each month, so a secured credit card can build or improve your credit history. If you manage the account responsibly, the creditor may switch your secured card to an unsecured card and refund your deposit. The TakewayAt the end of the day, either card is a good fit for your wallet—it really depends on your circumstances. If you prefer cash and you don’t have a bank account, or if you want to keep some funds separate from bill money, a prepaid card can help you better manage your cashflow and personal finances.
On the other hand, if you’re building credit from scratch or need to improve your score (and you can’t qualify for other types of credit), a secured credit card can get your foot in the door and provide an opportunity to prove you’re creditworthy.
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