Rebuilding Credit: Prepaid Credit Cards or a Secured Credit Card?

Rebuilding Credit: Prepaid Credit Cards or a Secured Credit Card?

Posted in Articles by Jessica

People who would like to use a credit card for purchases, such as from an online store, have in the past had to rely on a strong credit history to be approved for a credit line through a bank or credit agency. However, the recent decades have seen a shift to accommodate individuals who have less than perfect credit, or those who do not have access to a traditional bank account. Prepaid and secured cards act as alternatives for those who wish to either rebuild their credit history or avoid the three major credit bureaus in order to use a credit card.

A secured credit account card allows the user to deposit an amount (typically between $200-4,000; some are unlimited) into a collateral account. These cards are generally issued by a major creditor or a nationwide bank and require a short application process. The balance in the established collateral account then acts as the line of credit for the secured card attached to the collateral. Individuals using a secured credit card must make monthly payments against the balance they have charged, as is the case with a traditional credit card. A prepaid credit card, however, does not require a separate bank account or collateral fund. Money is deposited to the card when the prepaid card is purchased. As a result, most prepaid card accounts have limits of $50-500 and must be paid with cash only.

If an individual does not have or cannot obtain a traditional bank savings or checking account and has cash on hand, a prepaid credit card is a good solution to process cashless transactions at shops, online, etc. There are also no interest charges or APR fees applied to the card's balance on a monthly basis. Because there is no credit check or bank references needed, virtually any adult over the age of 18 with a valid Social Security Number can obtain a prepaid credit card. Prepaid cards will generally not be of use to individuals who are rebuilding credit due to past errors - they are not linked in any way to the three major credit reporting bureaus. Prepaid credit cards often charge fees in a variety of ways. Most companies who issue prepaid credit cards charge a fee to purchase the card, a monthly administrative fee, and fees for when the card is used at ATMs and when cash is reloaded to the card itself. Individuals who decide to use a prepaid card must take this into consideration when determining their card's available balance. A majority of companies that issue these cards do not offer purchase protection if the card is lost or stolen, which is a risk factor associated with the use of prepaid credit.

Secured credit cards, usually linked to a bank or major creditor, are useful for people working at rebuilding credit scores. The credit line associated with these cards corresponds to the amount of cash collateral that the applicant deposited at the beginning of their credit card term. Unlike a prepaid card, a secured credit card has an APR rate that is calculated monthly; prompt monthly payments are necessary to maintain a favorable standing with the crediting institution. Many companies will increase the credit line on a secured card after three to five months of consecutive, on-time payments. These increases occur without any additional collateral offered by the user of the card and act as a reward for making timely payments. In contrast to the monthly fees associated with prepaid credit cards, secured card accounts usually have a low annual fee and no enrollment fees. The companies who issue cards that are secure by collateral report payment history to the three major credit reporting bureaus, which gives people with less than perfect credit a chance to rebuild their existing credit and improve their score. Several banks offer special promotional secured credit cards that have no interest fees applied for a specific amount of time.

Owning and using a prepaid or secured card can be a reasonable solution to a financial problem. However, in each case, a sizable amount of money is required up-front on the part of the applicant. The fees associated with prepaid and secured cards can vary widely based on the applicant's history and the type of card that is desired. Prepaid cards often charge a monthly service fee and a fee for purchasing the initial card, on top of fees when additional money is added to the account, and when the card is used at an ATM. Secured credit cards, while based on the user's collateral, still require monthly payments that have had an interest fee (determined by the issuing company or bank) added on to the line of credit. Many of the secured cards offered also have an annual service fee. It is important to be cautious about the protection offered to card users by the issuing company in both prepaid and secured cards; some companies instruct the user to treat the card as cash, and will not offer any purchase protection if the card is lost or stolen. This is also the case with some secured credit cards; however, a greater number of secured card companies will offer the same protection they extend to traditional credit card holders.

Individuals who are rebuilding their credit score who have an active bank account should consider a secured or prepaid card option. The credit score requirements for a secured card are not nearly as strict due to the collateral account - the amount is determined during the application process as a joint venture between the creditor and the applicant's information, such as monthly income and amount available for a security deposit. Timely payments to a secured credit card will increase a user's credit score and potentially lead to an increased credit line. For individuals with poor or little credit history who do not have access to a bank account but wish to use a credit card (for example, in online transactions where cash cannot be used), a prepaid credit card is a reasonable option. However, the risk is greater with a prepaid card due to lack of purchase protections; the prepaid companies often also charge a greater amount of fees based on the transaction type.

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