Where They’re Alike
Both secured credit cards and prepaid cards require you to deposit money before you can use them. Both can be used in the same places that credit cards can be used, e.g. grocery stores, gas pumps, etc. But, that’s where the similarities end.
How They’re Different
A secured credit card requires you to make a security deposit against the credit limit before you can be approved for the card. Your security deposit is placed in a savings account or certificate of deposit (CD) and kept there until your card is converted to an unsecured credit until you default on the credit card (hopefully you never do).
Purchases made with a secured credit card go against your revolving credit limit. When you pay off your credit card balance, your available credit goes up again, just like a regular credit card. The security deposit is required because you're a more risky borrower.
Prepaid cards are different. Though they’re often called prepaid credit cards, they’re not credit cards at all. There’s no credit limit for a prepaid card. You make a deposit onto the card and it goes into an account. When you swipe the card for purchases, the balance is deducted from your balance. Once you spend up your deposit, you must redeposit money before you can spend again.
Fees vary between the two credit cards. A secured credit card has fees typical of a credit card: application fee, annual fee, finance charge, and late fee. Some of these fees are required. Others can be avoided if you use your credit card responsibly.
Prepaid cards have entirely different fees and, depending on the card you choose, some of them can be high. Activation fees and monthly maintenance fees are charged the first time you open your account and each month the account is open. You may have to pay a fee to reload money onto the card, to withdraw money from an ATM, or to use bill pay. There are some prepaid cards that are completely free. There are no interest charges or late fees with a prepaid card.
Which Do You Need?
If you want to improve your credit score, a secured credit card is the best choice. Make sure you choose a secured credit card that reports to the three major credit bureaus. Some credit card issuers will covert your secured credit card to an unsecured one after 12 to 18 months of timely payments.
A prepaid card is often a choice for people who can’t get a checking account or want to avoid banks. Many employers can direct deposit your paycheck onto a prepaid card and some prepaid cards even let you send a few checks each month or enroll in online bill pay. Prepaid cards are also good for teenagers and students who get an allowance from parents.