Prepaid Credit Card Vs. Prepaid Debit Card

Prepaid debit and credit cards are like regular plastic with training wheels. While they work in much the same way, prepaid debit cards allow the user to practice spending without worrying about overdrawing on a bank account, where prepaid credit cards can actually have an impact on your credit report.

Prepaid Debit Card

Unlike regular debit cards, prepaid debit cards do not draw from your bank account. Instead, you load money onto the card and may spend only that amount. Oftentimes, people use prepaid debit cards when they can't obtain a bank account or when they have trouble staying out of debt. Since a prepaid debit card isn't linked to your bank account, there's no danger of overdraft fees. However, these cards do not help you to build your credit.

Prepaid Credit Card

Prepaid credit cards are usually called secured credit cards because you are using only the amount that you deposit into the account. A secured credit card differs from a prepaid debit card in that you continue to make monthly payments toward items you purchase. The benefit of a secured credit card is that it helps you to build or establish credit. Those who have no credit or have wiped out their credit histories with bankruptcy may rebuild using a secured card.

Warnings

Both prepaid debit cards and secured credit cards may come with high fees. It's vital to read the fine print in the card agreements before signing up for one. These companies may try to take advantage of consumers who have limited options.

Considerations

Even if you have no credit history, you may be able to establish credit through a traditional credit card right away. Banks sometimes offer credit cards geared toward customers who are new to credit. These cards usually have low limits, but you don't have to put any money down to secure them. Also, if you are using your secured credit card to establish credit to obtain a traditional card in the future, you should wait several months before applying for the traditional card. Applying to too many accounts at once negatively affects your credit report.