There are twice as many credit cards in Canada as there are Canadians. That makes us one of the heaviest credit card users in the world. They’re almost universally accepted, offer rewards and travel benefits, and you can still get the stuff you need when cash is tight. The catch? You need a good credit score to get a credit card, but it’s hard to build credit without one. Secured credit cards and prepaid credit cards are excellent alternatives for those who don’t qualify for a traditional credit card or want to avoid the dreaded debt trap. But what is the difference and how do you choose the right card? They’re not all created equal and it pays to shop around. Here’s what you should know:
What is a secured credit card?
A secured credit card is just like a traditional credit card but you need to provide a cash deposit in order to get it. Think of the security deposit you put down an apartment: that money protects the landlord from financial loss in case you wreck the place. The cash deposit for a secured credit card protects the credit card company from financial loss in case you don’t pay back what you owe. In most cases, your credit card limit is the same amount as your security deposit.
Secured credit cards were designed for people who cannot get a traditional credit card. Whether you have bad credit or no credit, a secured card can help you repair or build your credit history. Secured credit cards offer almost guaranteed approval because you have to provide a cash deposit upfront. As long as you are the age of majority in your province and have some income or a way to pay, almost anyone can get a secure credit card. Your security deposit is held in trust and you cannot access those funds unless you settle your balance and close the card.
What is a prepaid credit card?
If a traditional credit card and a debit card had a baby, it’s the prepaid credit card. A prepaid card is just like a debit card because you can only spend money you already have, and there is no credit check required to get one. You deposit money into an account linked to your prepaid card, and the card limit is the same as the balance in the account. A prepaid card is more versatile than a regular debit card because it can be used to shop online and abroad just like a traditional credit card. You can also use it for things that normally require a credit card like booking hotel rooms, plane tickets, paying bills and more.
Most prepaid cards in Canada are partnered with either Visa or Mastercard, making them a globally accepted form of payment anywhere Visa or Mastercard are accepted. Where your particular card is accepted depends on whether it’s Visa or Mastercard branded. Many Canadian banks now offer a debit-credit card as a standard feature of your chequing account. You can also get one by opening an account through a non-bank financial service provider or buy one from retailers like grocery and convenience stores.
Do secured cards and prepaid cards affect your credit score?
Secured credit cards impact your credit score just like traditional credit cards. With every purchase, you borrow funds from the credit card company and need to pay them back. Any balance you owe past the interest-free grace period will start to accumulate interest charges. Your payment history and balance owing are reported to the credit bureaus every month. If you make your payments on time and keep your balance low, or pay it off in full every month, your credit score will grow over time. If you miss payments, max out the card, or stop paying altogether you will damage your credit score.
Prepaid credit cards have no impact on your credit score. There is no credit check or minimum credit score required to get a prepaid card because you are not actually using any credit. When you make purchases with your prepaid card you are spending your own money, not borrowing it. Therefore, your creditworthiness is irrelevant. Whenever you use your prepaid card, the amount of your purchase is subtracted from the funds in the linked account, just like when you use a debit card on your chequing account. If you budget like a boss and pay your other bills on time with your prepaid card, you won’t get any credit score benefits. On the other hand, you won’t hurt it either and you’ll never pay interest.
Which one is right for you?
The right card depends on what you need the most right now. If you need to improve your credit score, a secured credit card will help you do that. If you want to avoid debt and credit card interest or just want a more convenient way to pay, a prepaid card is the way to go.
Then you need to consider what else you want from the card. There are tons of different secured credit cards and prepaid cards on the market, all with different benefits and drawbacks. Once you decide between a secured or prepaid card, you need to narrow it down and find the best one for your goals and spending habits. And watch out for fees! You won’t pay interest on a prepaid card, but you will on a secured card if you carry a balance. Other costs to consider are monthly or annual card fees, transaction fees, foreign transaction fees, etc.
Both types of cards used to get a bad rap for not offering any perks like cash back, travel rewards, or purchase protection. Times have changed and now both types of cards offer almost all the same perks that traditional credit cards do. The competition for your business is fierce, so don’t just settle for the first card you’re offered, you could be leaving free money on the table. Some prepaid cards from alternative financial service providers can even help you build credit without borrowing or interest. Whether it’s a secured credit card or a prepaid credit card, comparing cards will save your bacon.