Most people learn the basics of personal financial management during adolescence from their parents or through classes at school. These lessons usually include understanding money, creating a budget, and learning the importance of saving. They also probably explained the basic differences between a debit and credit card. However, these lessons probably didn’t include information on secured credit and prepaid debit cards.
Secured credit and prepaid cards are offered as alternatives to credit cards by businesses that provide a card-based membership program. However, most people are not aware of these options. Nor do they know how they can determine which option is right for them. Read on to learn more about the difference between prepaid and debit cards and how to decide which option is right for your business.
What Is a Secured Credit Card?
A secured credit card, also called a secured card, is similar to a regular credit card. Like a credit card, the user has a limit to how much they can purchase using the card and must make a minimum payment each month. Also like a credit card, the issuer of a secured card reports credit limits, balances, and payment history to credit bureaus, so changes in these factors will impact your credit score.
The big difference between a secured credit card and a regular credit card is that the user must put down a deposit for a secured card, usually equal to the card limit. This deposit is not the same as a payment, and the user will still have to make minimum payments each month to avoid negative marks on their credit score. Instead, the deposit serves as a safety net for the issuer if the user does not make payments on the card.
When a user does not make a payment within a predetermined time span, the issuer will close the account and keep the deposit to make up for any debt left on the card. The user can get the deposit back if they choose to close out the card.
In some cases, issuers may offer a graduation component, which allows users to transition to a traditional credit card once they have proven to the issuer that they can consistently make payments. Typically, the higher your credit score is upon opening the secured credit card, the more likely you are to graduate to a traditional credit card within 2 years. Research shows 27.6% of users with good credit scores upon opening a card graduate to a credit card within 2 years, as opposed to 10% of those with very poor credit scores.
What Is a Prepaid Card?
A prepaid card is like a normal debit card. The user loads the card account with funds electronically, which the user can then spend until the funds are gone. With a prepaid card, there are no monthly payments and no interest rates. Since the user is not borrowing money from the card issuer, there is no credit associated with a prepaid card, and the card has no impact on your credit score.
Secured Cards vs. Prepaid Cards
Secured cards and prepaid cards differ in various ways, and these differences can impact which type of card a consumer may use. Below is a summary of the significant differences between prepaid cards vs. secured credit cards:
- Credit building: If a user is looking to build their credit, a secured credit card can help do that, provided the issuer reports payments to the three main credit reporting agencies. Because secured credit cards are used the same way as normal credit cards, they will help build a positive credit history. Prepaid cards will not affect a user’s credit at all since prepaid cards do not rely on credit to make purchases.
- Initial deposit: With secured credit cards, the user needs to give the issuer collateral to open the card, often matching the amount of the secured card’s limit. This collateral does not go toward card payments, and the user must still pay each month to keep the card open. Prepaid cards, on the other hand, simply require users to transfer funds to the account, which they can then spend immediately. Once the funds run out, the user needs to transfer more money to the account to spend more.
- Application process: Users can apply for secured credit cards at credit unions, banks or credit card companies, and both secured and prepaid cards may be available from certain types of stores. Secured credit cards typically require a basic credit check before the issuer opens the account and collects the deposit. Prepaid cards, on the other hand, do not require a lengthy application process or a credit check before opening since they do not use credit.
Which Is Right for You?
The type of card that will work best for you depends on your financial situation and business goals. Both secured credit and prepaid cards require funds to be applied before using the card, but the money works differently for each. Here are some primary points to consider before choosing between a secured or prepaid card for employee or customer use:
- Credit goals: If you are looking to build credit, a secured card is the best option, as it opens a line of secured credit for the user. For this card to help build credit, you need to make monthly payments and keep carryover balances as low as possible.
- Budgeting: Both prepaid and secured cards tend to have low spending ability, so both are good options if sticking to an organizational or departmental budget. Prepaid cards come out on top in this regard, however, as they do not require you to borrow money to spend funds.
- Membership: Both prepaid and secured credit cards may be available at certain retailers to give users access to a card membership program and discounts. Secured cards are less common in this respect, however, so if your business does not qualify for a normal credit card, a prepaid card is often the only alternative.
If you’re not sure which option is best for your company, discuss the pros and cons with a financial advisor who can help assess your decision and determine the best choice for your goals.
Issue Credit and Prepaid Cards With Hydrogen
Prepaid and secured cards are a valuable option for consumers and businesses with poor credit or specific budgeting goals. While credit cards tend to be the go-to for businesses offering store-specific purchasing options, retailers that want to expand their customers’ purchasing power should also look into offering prepaid and secured cards.
Retailers should also explore offering all of these options as virtual cards. Virtual cards link to mobile apps and are highly secured, eliminating the possibility of losing a physical card and minimizing the risk of theft through encryption, which benefits both customers and businesses.
If your business is looking to expand into financial services, Hydrogen can help. We make it simple to add financial services to your business’ apps with an easy-to-implement card issuing service. Our platform allows businesses to start issuing physical and virtual debit and prepaid cards to customers and employees quickly, without major system overhauls.