Just like a regular credit card, you receive a bill each month for what you spent during the prior billing cycle, which you will pay to the lender. Your security deposit is simply held in case you default (stop making payments); it's not a replacement for your monthly payments. And in nearly all cases, the secured credit card deposit is refundable after a certain period of time -- or when you close your card -- as long as your account is in good standing. If you default, the credit card issuer keeps your deposit.
The reason that these card issuers require a deposit is that it's risky to lend money to borrowers with no or low credit scores. The security deposit ensures that the lender won't lose money if the borrower defaults.
Store credit cards
Store credit cards, or cards that are limited to use in a particular retail store, can also help you build credit -- and in most cases, you won't need to put up a security deposit, even if you have bad credit. These cards are unsecured, meaning the lender gives you a credit card limit based on your credit score and financial picture, and you do not have to put any money down. That said, the limits on these cards are typically a lot lower than you would get with a regular credit card.
The upside is that these cards report to credit bureaus every month, so if you use them responsibly, they will help you build credit. There are some downsides, though, including the card's limited use -- you can often only use them at certain stores -- and the typically high interest rates.
Authorized user
Another option for building credit is becoming an authorized user on someone else's credit card. If you have a friend or family member with good or great credit who's willing to add you to their credit card account, their on-time payments and responsible credit card use will help you build your credit score.
As an authorized user, you get your own card on their account, the ability to use the credit card as you would any other credit card, and the credit benefits that come with their responsible account use. What you don't get, however, is the legal liability in case they default.
Becoming an authorized user is one of the easiest ways to build credit and obtain a credit card, but you should make sure to understand the whole picture when taking this route -- as should the person who's adding you to their account. If you use the card, you will be responsible for your portion of the bill, so those details need to be solidified before you are added as an authorized user to someone else's account.
Final thoughts
A prepaid credit card won't help you build credit, but there are a few other options you have for building credit with a credit card. Being added as an authorized user, opting for a secured credit card, or getting a store card can help you build credit, as all three options report to the credit bureaus each month. If used responsibly, these types of credit cards will have you on your way to building great credit in no time.
Ready to get started? Here's how to apply for a credit card (and get approved)!