Moving Up and On From Prepaid Debit Cards

This post comes from the NerdWallet.com team, personal finance bloggers and experts in helping users find the best low APR credit cards.

If you are a consumer that has a bad or no credit history, you have likely found that prepaying for things you want is a part of life. So many things you use on a daily basis, like debit cards, cable, and cellphone bills are all prepaid. Some of these tools just help you to tread water, but there are a few that do indeed help to build up your credit so you can move on.

Say you’re looking to rent a car without a solid credit history and need a card to do so. You can get a prepaid debit card and load money on it, or you can get a secured credit card, which requires you to post upfront money for collateral, but still requires you to pay the bills.

With these two options, you will find different fee structures that have their own pros and cons. A secured credit card is not the most consumer-friendly tool, but it is a better choice than a prepaid debit card to build up from a limited credit history.

How do secured and prepaid cards differ?

Prepaid and secured credit cards work similarly. In order to get either one, you will have to open up an account using your social security number. Then you put a couple hundred dollars of collateral on the secured credit card to establish credit line, or you can put a balance on your prepaid card, allowing you to spend that equal amount.

Once you have spent the money on your prepaid card, you don’t have to put any more money back onto it, since there is no obligation to pay it back. The amount is deducted from whatever your balance is and whenever you load more money on, you can use that. With the secured credit card, you are required to repay whatever you spend off of the card. If you don’t pay your bill monthly, you can face late fees and interest. It acts just like a regular credit card, except the bank doesn’t have to face the risk that you won’t pay. Because of this, secured cards get reported on your credit history, while prepaid debit cards do not.

What’s Good About Prepaid Debit Cards

  • There is no requirement for you to pay back any money that you spend for the month and you can’t spend more than what you have on your card, so no overdraft fees, and no spending more money than you have.
  • You can get direct deposit onto your debit card and you can use ATMs that are in-network for fee.

What’s Good About a Secured Credit Card

  • You can use it to build your credit history
  • It has lower fees when from a large national bank. Those from shady online web sites have much higher fees. Most local banks only charge a $30 or less yearly fee. With prepaid cards, you would have to face $3-6 monthly maintenance fees and will have to spend in that range each time you reload your card, plus ATM, balance inquiry and activation fees.
  • After getting your secured credit card, you can get an unsecured one after 12 to 18 months of paying on time. This will then qualify you for higher end credit cards like premium rewards credit cards.
  • Your chances of getting ripped off are a lot slimmer with a secured credit card. Prepaid cards leave you exposed, even though many make claims of fraud protection. You can become a victim of money vanishing mysteriously and losses during disputes against merchants. Then the complaints for customer service are pretty unbearable.

Choosing a secured credit card will help to open up new opportunities for you. You can get cell phone plans from places like AT&T that are postpaid and you’ll likely get credit card offers from banks. Then in the future, you may be able to get approved for a car loan, student loans, or mortgage.

Having a Secured Credit Card and Checking Account is Better than a Prepaid Any Day

Even though they don’t help your credit, prepaid cards have been growing in popularity. But if you are planning to use your debit card quite often, the expense can be unsettling. Checking account debit cards are free to use and replenish.

To compare users’ options, we did a hypothetical test of 10 of the largest checking account providers with the 10 most popular prepaid card providers (like WalMart MoneyCard). What we found out is that the average monthly costs for prepaid debit cards is around $19.14, and only $6.82 for checking accounts. The appendix below shows how we obtained these numbers.

In our opinion, we recommend that you get a secured credit card with a checking account instead of risking the hassles of a prepaid debit card. Both do require you to use your social security, so there is lack of privacy, but you will get better protection with the checking account and secured credit card. Plus, it costs less and helps to build up your credit.

*Appendix

We made the assumption that normal usage of a prepaid debit cards would include 1.5 withdrawals from ATMs, 8 purchases, 1 balance inquiry and 2 reloads. Some of the prepaid debit cards that we compared include Vision Premier, Walmart MoneyCard, Rush Card, Emerald Card, Green Dot, AccountNow, NetSpend Visa, Western Union MoneyWise, PayPower and ACE Cash Express (NetSpend).

Then for the banks, we made the assumption that checking account holders would spend around $100 and use an out-of-network ATM only once monthly. The checking account fees were compared between financial institutions like Capital One, Citi, PNC, Wells Fargo, Bank of America, Chase, HSBC, US Bank, Citi, TD Bank and SunTrust.

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14 Responses

  1. I’ve had a secured credit card before and it definitely helped me restore my credit. However, I hated the fees and ditched the card as soon as I was able to get a normal credit card!

    • Jake says:

      Yeah, those fees can be killer… even secured cards can be pretty expensive, but you can generalize minimize the expense by going with a large national bank or a local credit union.

  2. Great post. A secured card could be really useful if someone has credit problems.

  3. Great advice with the secured credit cards. These are also a great option for young people who have no credit history.

  4. I am a fan of secure credit cards. It is something I consider to be the easiest, and safest tool a person can use to rebuild their credit history and score.

  5. Jennifer says:

    Also, bank customers who do not overdraw their accounts will pay much less than the projected checking account fees that were used in the study. Bank deposits also offer additional protection by the FDIC, which insures deposits up to $250,000. When you deposit money with a general-purpose reloadable card, the company you deposit it with pools it with others’ funds and deposits them. Their money is FDIC-insured (up to $250,000), the consumer’s isn’t. Your access to the money depends on the solvency of the company holding it.

  6. Nancy White says:

    If you can pre-pay a debit card, what do you need it for? The only good I see about it is that there is no need to bring cash with you. But with the fees linked with debit card use, I surely need to be given a good reason why a pre-paid debit card will be practical.

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