Credit cards have become one of the primary ways of making payments, and they also help create a credit history. Understanding the different types of credit cards is imperative since their benefits and features differ. Generally, most credit cards fall under either secured or unsecured cards. However, there are also prepaid cards that are load and pay-as-you-go kinds.
Below is the guide that helps you understand what prepaid, secured, and unsecured cards are and how they differ. Check which kind of credit card you have and analyze all the different ways you can use it.
Understanding the Cards: Prepaid, Secured, and Unsecured
The first step in understanding credit cards is going through their different types. Below is every kind of credit card and what they signify.
Prepaid Card
A prepaid card is where you can spend only the amount that you load on that card. It works like a gift card where any lender provides no credit. So, you do not borrow money whenever you are spending. Some banks and financial institutions provide prepaid credit cards for businesses that do not qualify for unsecured cards.
Secured Credit Card
A secured card is the one that needs a refundable security deposit. In this case, your bank only extends credit with a security deposit as collateral. It reduces the bank’s risk of giving you a credit card, but the collateral is returned if you upgrade to an unsecured card or close your account.
The security deposit is available to your bank if you owe them money. But do not consider your deposit a backup payment since delayed payments are reported, and you are charged interest or other fees. Getting a secured credit card is the best option if you have low credit or have not built a good credit history.
Unsecured Credit Card
An unsecured card is opposite to the secured one, and it does not need a security deposit. The card issuer will give you a credit line based on your creditworthiness during the application process. You are not required to put down any money to get an unsecured credit card. At the same time, these cards don’t come with high credit limits. However, unsecured credit cards can come with more perks depending on your issuer and offer better rewards than secured credit cards.
Difference Between Prepaid, Secured, and Unsecured Cards
Secured credit cards are the ones everyone most likely encounters, but both prepaid and unsecured cards can be better suited if you know how they differ. So, go through the points below to understand their differences.
Requirements
Prepaid cards need to have a specific amount loaded for you to use. You must reload your card once the amount is depleted. On the other hand, secured cards need a security deposit by the issuer to set your credit line. Unsecured cards do not need collateral to set the credit line.
Credit Lines
Prepaid cards do not have credit lines, whereas secured and unsecured cards need credit lines whose amount depends on the credit card issuer.
Borrowing
Prepaid credit cards don’t require borrowing since you fund all your expenses. The credit card issuer is lending to you in secured and unsecured cards. However, the former needs collateral, and the latter does not.
How Does Each Card Help Your Credit?
Prepaid cards generally do not affect your credit in any way. They are not connected to CIBIL and are unlikely to boost your credit score. However, if any prepaid card is reported to CIBIL, it holds relatively less weight than unsecured or secured credit cards.
Secured and unsecured credit scores are great for building your CIBIL score and using the credit card app. Your credit report will not differentiate between secured and unsecured cards and will be affected similarly. If you make your payments on time, your secured and unsecured credit cards will boost your CIBIL score.
Conclusion
Some prefer one kind of card over the other, and each has its benefits. You can go for prepaid cards if you don’t want to use borrowed money or you are unconcerned about your credit score for the most part. Use a secured credit card to keep collateral with your issuer. However, getting an unsecured card is beneficial if you want a higher credit limit. You can also use the credit card app to check how each card affects your CIBIL score.