Wednesday, October 30, 2013
Definition Prepaid Credit Cards Canada vs Secured
I just received this email asking for the definition between prepaid and secured.I was wondering if a secured credit card is distinguishable from a regular credit card. I have currently been using a prepaid card but several hotels and car rental agencies have recently turned me down when they have recognized the prepaid card. I only really want the credit card for hotel and car rental use, as well as rebuilding my credit.My answer:PREPAID CARD DEFINITIONCanadian Prepaid CCs are not technically credit cards. They don't offer you any credit, and you didn't have to apply for credit in order to get one. Also, the issuing company didn't have to pull a credit bureau report from Equifax Canada or TransUnion Canada in order to see if you are credit worthy.Prepaid cards are really glorified debit cards and they're not necessarily attached to your bank account. They can have the Visa or MasterCard logo on them.Here's how they work... you deposit money into the card, say $500. You can then proceed to spend the money on the card until it's all finished. It's kind of like a unsecured credit card in reverse.There is no credit limit, and you have to "refill" the card again in order to use it again.The nice thing about a prepaid credit card is that you'll never go into debt using it.HOW HOTEL "TRANSACTION HOLDS" WORKNOTE: This example uses a credit card, not debit / prepaid cardTo answer the question on the email as to why hotels don't accept a prepaid credit card... Hotels and restaurants will usually preapprove a credit card to see if it's got an adequate credit line available before they will take the card.Example: You want to stay for 2 nights at a $100 per night hotel. 100 x 2 = $200 Taxes x15% = $15I called a few hotels and they said that they would put a 2 night hold on the credit card for $150.00 per night. Total $300. This nightly hold allows for any overages such as meals charged to the room or movies watched.I called my credit card company and asked them what happens when a hotel or restaurant puts a "hold transaction" on your credit card account.Let's say you had $500.00 available on your CC at the time your were booking the hotel. They would put a temporary hold of $300 on your credit card. Your credit available limit is reduced by that $300 to only $200.-----------------I believe that hotels cannot put a hold on prepaid credit cards. In the same example: if you had a $500 limit on your prepaid credit card, and tried to book the same hotel for $300, you would still be able to spend that $300 as there was no hold on those funds. There is no way for the hotel to secure those funds for themselves.CORRECTION: I'VE BEEN INTERCHANGING THE TERMINOLOGY "PREPAID CREDIT CARDS WITH SECURED CREDIT CARDS"I just wanted to point out that I've been interchanging the terminology prepaid credit cards with secured credit cards. While we do offer a Capital One secured credit card on this site, it's not the same as a prepaid credit card.SECURED CREDIT CARD DEFINITIONA secured CC is a real credit card where you get a real line of credit. This line of credit is secured by a cash amount that is held by the creditor until the end of the credit cards agreement.Example: The HomeTrust Visa card has a credit limit of $1000. This card requires that you put a deposit of $1000 as security for that limit.Once that's in place, you use the $1,000 limit just like a credit card. Use it up, pay it off, pay interest on the balance etc. The credit limit stays in place even though you've used it up.Because a secured credit card is a real credit card, it reports like a real credit card to Equifax Canada and TransUnion Canada. Thus it helps you to rebuild your credit score with the credit bureaus.