Since secured credit cards and prepaid cards are both kickstarted by an initial deposit, it can be tricky to differentiate the two. Still, these two financial tools are distinct. Secured credit cards are activated by a security deposit that works as collateral for missed payments and usually helps determine your credit limit. In contrast, any funds loaded onto a prepaid card are pulled from money that’s already in your pocket; there’s no borrowing involved. In this post, we’ll explore how these card types differ and compare.
Side-by-Side Comparison of Secured Credit Cards and Prepaid Cards in Canada
Secured Credit Cards | Prepaid Cards | |
How they work | You provide a security deposit, guiding your credit limit, and borrow against it | You load funds onto the card and spend only what you’ve loaded; no borrowing |
Credit check | Varies — many issuers run no hard check. | No |
Security deposit | Yes | No, but you must load funds before spending |
Credit builder | Yes | No |
Card fees | Yes, with no-fee options | May include activation, monthly, or reloading fees |
Interest | Varies widely, roughly 15% to 30% depending on issuer and province. | No |
Rewards and perks | Sometimes | Rarely |
Key Differences Between Secured Credit Cards and Prepaid Cards in Canada
There are a few key differences between secured credit cards and prepaid cards: deposit types, spending, and purpose.
Deposit Types
As outlined in the intro, the first difference between secured credit cards and prepaid cards are the deposit types.
Secured Credit Cards
When you deposit money into a secured credit card, you’re essentially establishing your credit limit and providing collateral for your issuer in the case of missed payments. Your credit limit is usually equal to or higher than your security deposit.
Prepaid Cards
When you deposit money into a prepaid card, you’re simply loading a balance onto the card to spend down.
Spending
Another main difference between secured credit cards and prepaid cards in Canada lies in the cards’ names: secured “credit card” vs “prepaid card”.
Secured Credit Cards
A secured credit card is a true “credit” card that borrows money from a lender based on a credit limit influenced by your security deposit. Once you spend and pay off your card, your available credit bounces back.
Prepaid Cards
A prepaid card isn’t a credit card at all. You can only spend the sum of funds that you’ve preloaded onto the card. Once your balance hits zero, you must reload the card to continue shopping. Basically, there’s no borrowing or revolving credit involved.
Purpose
Based on their structure, both secured credit cards and prepaid cards differ in their overall purpose.
Secured Credit Cards
When you use a secured credit card, your credit behaviour is usually reported to major credit bureaus in Canada; either Equifax or Transunion or, sometimes, both. When used responsibly, secured credit cards can be an excellent credit builder for anyone struggling with poor or non-existent credit.
Prepaid Cards
Since they don’t borrow any money, prepaid cards won’t help you build your credit. Instead, they can be used effectively for budgeting and avoiding debt.
Who Should Apply for a Secured Credit Card in Canada
Compared to traditional, unsecured credit cards, secured credit cards are easier to qualify for since approval is more heavily weighed on the security deposit rather than your creditworthiness.
Once you’ve provided a deposit, your secured credit card works similar to a traditional credit card, potentially improving your credit score with responsible use.
With this in mind, a secured credit is best for:
- Those with poor or non-existent credit
- Newcomers to Canada
- Anyone who has filed for bankruptcy or submitted a consumer proposal
- Students and young adults who are brand new to credit
Who Should Apply for a Prepaid Credit Card in Canada
As you now know, prepaid cards won’t help you build credit, but they can help you stick to a budget or access versatile cash.
Ultimately, prepaid cards are best for:
- Budget-conscious spenders
- Teenagers
- Those looking to avoid the risk of debt
Prepaid cards can also make flexible gifts for the pickiest of recipients.
Conclusion
Canadians looking to build or repair their credit can opt for a secured credit card, but those striving to stick to a budget and avoid debt might do better to consider a prepaid card. You can also slip both card types into your wallet for the perfect credit building and budgeting duo. The best part? They’re both very accessible, dodging the trickiest of application requirements that come with some traditional credit cards.
FAQ
Are secured credit cards and prepaid cards the same?
No. Secured credit cards allow you to borrow money from a lender based on a security deposit, while prepaid cards only pull from preloaded funds. Secured credit cards can help build credit, prepaid cards cannot.
Do I have to reload my secured credit card?
No. You do not reload a secured credit card like you do a prepaid card. Instead, you provide a security deposit that helps set your credit limit, then borrow against it.
Do prepaid cards affect my credit score?
No. Since the money on prepaid cards isn’t borrowed money, your spending habits aren’t reported to the credit bureaus.
Who issues secured and prepaid cards?
Secured credit cards and prepaid cards are issued by various financial institutions and are typically networked by Mastercard or Visa.