The Difference Between Prepaid and Secured Credit Cards

The Difference Between Prepaid and Secured Credit Cards

Two credit card products that often get confused are secured and prepaid credit cards.    Let’s take a closer look at the characteristics of each one and some of the things you should be aware of before choosing either of these products.

Secured Credit Card (Visa or MasterCard)

  • Lender requires a deposit, often equal to the credit limit (i.e. $300 deposit = $300 limit)
  • Requires a minimum monthly payment
  • Can be used anywhere Visa or MasterCard s area accepted
  • Plan a trip – book a car rental or reserve a hotel room
  • Make online purchases
  • Access cash 24/7 at ATMs worldwide
  • Allow you to establish or rebuild credit history
  • Good for students; consumers who have had credit problems in the past; or new Canadians

Things to be aware of

  • Be cautious about secured card offers from unknown institutions
  • Beware of secured card offers from issuers outside Canada. If you have problems it may be difficult to resolve them if the company is not located in Canada.
  • Avoid offers for secured credit cards that do not have a recognized brand name such as Visa or MasterCard
  • May not be accepted by all retailers

Fees

  • Annual fees can range from $0 to $59
  • Annual fees apply for additional cards
  • Average annual interest rate of 19%
  • Cash advance/ATM fees

Prepaid Credit Cards(Visa or MasterCard)

  • Requires no application or credit checks
  • The card must be loaded with your own cash
  • Accepted by most retailers where Visa or MasterCard are accepted
  • Make online purchases
  • Avoid getting into debt

Things to be aware of

  • Does not help you build or re-establish your credit history
  • Cannot withdraw funds from an ATM
  • You may not be able to register your Prepaid Card for regular or recurring payments like your mobile phone or cable bill
  • Some restaurants and other service providers will add up to 20% to your bill when they request authorization for a purchase to cover any tip you might add.  As a result, your Prepaid Card may get unexpectedly declined
  •  Airlines, car rental agencies or hotels may accept your Prepaid Card for payment but typically not for the initial reservation.  Some do and some don’t.
  • A gas station may only accept your Prepaid Card inside the store but not at the pump

Fees

  • The activation fees can be as high as 5% of the card’s value
  • There are fees to re-load the card
  • They have charges per transaction, averaging about 39-cents each.
  • They have a monthly service fee after an initial six-month grace period.
  • They contain other fees (which include service support, activation fee etc...) which can easily make the card costly

Choosing the product that is best for you will depend on your circumstances.  Either way we encourage you to do your research and to read the application terms and conditions prior to opening one of these products.

For a free confidential consultation over the phone or in person in Saint John, Moncton, Fredericton or Charlottetown, please contact us.  Powell Associates Ltd. is a licensed insolvency trustee focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses.