Secured Credit Card vs. Prepaid Credit Card

Secured Credit Card vs. Prepaid Credit Card

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated December 1, 2022

Credit cards are a popular staple in many consumers’ wallets. They make it easy and convenient to make purchases without having to walk around with wads of cash and many even allow cardholders to collect points and rewards for every dollar spent. You can even order items online or over the phone and pay with your card, making this seemingly insignificant piece of plastic an important part of your spending habits and power.

But aside from conventional unsecured credit cards that most consumers know about, there are two other types of credit card products available, which many Canadians might find very handy: secured credit cards and prepaid credit cards. Both are designed for consumers with bad credit or limited spending power, but there are significant differences between the two.

Secured Credit Cards

Secured credit cards are very similar to traditional credit cards in that you’ll be given a specific credit limit that you are not allowed to go over. You can spend as much as you want every month, as long as the credit limit isn’t exceeded. You’ll pay an interest rate on the outstanding balance owed every month, and you’ll be expected to pay your balance by a specific due date at the end of every billing cycle.

Want to know how lenders arrive at their interest rates? Read this.

So, what’s the difference, you ask? The biggest difference between the two is the fact that secured credit cards require collateral to secure the card. Unlike traditional cards whereby no collateral is required – and hence are known as “unsecured” credit cards – secured cards require a deposit to be put down before they can be used. Essentially, this deposit serves as the credit limit on the card.

With regular credit cards, issuers depend on your credit history and promise to repay the balance in full at some point in the near future. These cards are typically offered to consumers who make a decent income and have a healthy credit score with no history of defaulting on loans or payments. In contrast, secured credit cards provide the issuer with the ability to recoup any potential losses if you’re unable or unwilling to pay down your balance in full.

Best Secured Credit Cards in Canada

 Annual FeeInterest RatesMin. Deposit
Neo CardTM (Secured)$019.99% – 26.99%$50
Plastk Secured Visa Credit Card$48 (+$6 monthly fee)17.99%$300
Home Trust Secured Visa Card0$ or $59– 19.99% (no annual fee)
– 14.9% (with annual fee)
Capital One Guaranteed Secured Mastercard$5919.8%$75

Prepaid Credit Cards

A prepaid credit card might sound a little like a secured credit card because it involves loading it with a certain amount of funds. This amount, in turn, cannot be exceeded. You’re only able to spend up to the specific amount added to the card.

Every purchase you make will be deducted from the amount you’ve loaded on to the card. Once you’ve spent the entire amount and the balance is at zero, there’s nothing left on the card to spend.

Where prepaid credit cards differ from secured credit cards, however, is the fact that the former involves no interest payments on outstanding balances or monthly bills to pay. That’s because you’re not borrowing any money from a credit card issuer, so there’s no interest to be paid to anyone. Many people may think that a prepaid credit card is a credit card, but it isn’t, mainly because of the reason we’ll discuss next.

Before you try a prepaid credit card, ask the provider these 10 questions.

A Word About Credit Scores

Perhaps there’s one more significant difference between secured credit cards and prepaid credit cards: their impact on your credit score. Since prepaid credit cards require no extension of credit to you, your credit score will not be impacted, regardless of how responsible you are with the card. While your credit score can’t be harmed by abusing a prepaid credit card, it also can’t help you improve your credit score even if you’re diligent with it.

On the other hand, a secured credit card can impact your score – both positively or negatively – depending on how you use it. Since there is an extension of credit involved with this product, your credit score can be impacted in either direction. As such, you can use this product to help build good credit.

Many consumers opt for either product because they are much easier to get approved for with a poor credit score. Typical credit card issuers like to see consumers with a good credit score before approving them for a traditional unsecured credit card. Unfortunately, those with no credit or bad credit may be out of luck in this department.

That said, they can still get their hands on a secured credit card or prepaid credit card which are designed for consumers in situations like these.

What About Fees?

One thing that these two products have in common are the fees. For prepaid credit cards, there are no interest fees to pay, but there will likely be annual fees to pay, Some come with higher fees than others, so it’s always best to scope out the different types of prepaid credit cards out there and compare the fees charged on each.

Shopping for low-interest rates? Consider these factors.

Secured credit cards also typically come with annual fees, but there are also interest fees to pay based on your exact rate and your outstanding balance. And if you don’t pay your balance off in full every month, that fee will be higher. In addition, you could also be faced with penalties if you’re late making payments every month.

Find out what happens when you stop paying your credit card bill.

Final Thoughts

Secured credit cards and prepaid credit cards are certainly not the same and have major differences between the two of them. That said, both can be great products to use to learn how to become a responsible spender. Be sure to understand exactly what each card is and what they can offer you and choose the one that most closely suits your particular needs.

If you’re looking to build or repair credit and you’re ready for the responsibility of having a credit card, then a secured credit card may be the way to go. If, on the other hand, all you want is a little versatility with your spending, then a prepaid credit card might work best. 

Rating of 5/5 based on 3 votes.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Save With Loans Canada

Special Offers

Borrow $500-$50,000

Borrow $500-$50,000

Don’t pay until March with this offer from our partner, Fairstone.* Ends January 31st.

View Offer
Cashback & Bonus Offer

Cashback & Bonus Offer
Ends March 1st, 2023

New Offer! Get up to $2,000 cashback + a $50 bonus on signing up. Conditions apply.

View Offer
Earn 5% Cash Back With Neo

Earn 5% Cash Back With Neo
No annual fee!

Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.

View Offer
Build Credit For $10/Month

Build Credit For $10/Month

With KOHO’s prepaid card you can build a better credit score for just $10/month.

View Offer
Best Personal Loan Provider by Greedy Rates

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.