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Which One Is Right For You: Prepaid Card or Secured Credit Card?

Prepaid card and a secured credit card are similar. But, these cards differ from each other. Prepaid cards and secured credit cards come handy for individuals who don’t have a good credit score or credit history.

You need to deposit money before you can use a secured credit card or a prepaid card. You can apply secured credit card against fixed deposit while you need to add money in your prepaid card before you can start transacting.

Customers can use a prepaid card and secured credit cards like regular debit cards and credit cards. These places include shopping malls, online shopping portals, etc. Prepaid cards such as forex cards are meant for international transactions. 

What is Secured Credit Card? 

Secured credit card is a credit card that is issued against collateral such as a fixed deposit. Customers need to open a fixed deposit of a certain amount to apply for a secured credit card. Few banks such as Kotak Mahindra Bank has made applying of a secured credit card hassle-free through their mobile banking app. Kotak 811 customers can fund their account and open a fixed deposit while applying for their secured credit card: Aqua Gold Credit Card. The credit limit of these cards is 80% of the collateral.

But, unlike regular credit cards, these cards can be availed by individuals who don’t have a credit history or a low credit score. Using these cards and paying the dues on time can help customers to build a credit score.

What is a Prepaid Card? 

As the name suggests, customers have to load their prepaid cards to use their card. Gift cards and forex cards are the two key types of prepaid cards. In the case of forex cards, individuals can add currencies of different countries. Customers can use the amount they have added in their prepaid card, and it debits the amount spent from their card. Unlike a credit card, a prepaid card does not charge any interest rate or late fees.

Differences between a Secured Credit Card and a Prepaid Card

Credit Limit / Transaction:

Secured credit card just like a regular credit card has a credit limit. While the credit limit of most unsecured credit cards depends on annual income and credit score, banks base the credit limit of a secured card on the collateral. The credit limit is around 80% of the collateral. The credit limit depends on the internal policies and varies from bank to bank. Most cards come with a minimum and maximum credit limit. E.g. the credit limit of a card can range between Rs.12,000 to Rs.12 lakhs.   

There is no credit limit in prepaid cards. Prepaid cards have a maximum amount that can be loaded in the card at a particular time. According to the Reserve Bank of India (RBI), the maximum amount which can be loaded is the equivalent of $2.5 lakh per annum per individual for the purposes covered by the Liberalised Remittance Scheme (LRS). The customer can use the loaded amount as per their requirements.

Impact credit score: 

Using a secured credit card impacts your credit score, while prepaid cards don’t impact the credit score. Regular use of your secured credit card and paying your credit card dues on time can help to build credit history and increase your credit score. Prepaid cards play no role in building a credit history or credit score. However, it is a good option for people with a limited credit score.

Interest charges:

Credit cards against FD charge interest if you carry a balance from one month to another. The interest rate charged will vary from bank to bank. You don’t have to pay any interest if you clear all your dues on time.

Banks charge no interest on prepaid cards.

Fees and other charges: 

Annual fee, renewal fees, late payment fees are some fees charged on credit card against fixed deposit.

Read: Are you looking for a credit card with no annual fees?

Prepaid cards come with initial load and issuance fee, reload fee, reactive fee, cross-currency fee etc. Most of the credit card charges are applicable yearly, while the charges on prepaid card mostly depend on the usage.

Conclusion 

Credit card against FD and prepaid card serve different purposes. If you looking for a credit card to build your credit history or increase your credit score, credit card against FD is the better option.

You should carry a prepaid card or forex card if you are travelling overseas for holiday or work.

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