Secured and Prepaid Credit Cards

Over the last month or so I’ve done a whole series of posts about secured credit cards. We’ve looked at their requirements for approval, their fees, their interest rates, and the benefits they have for people trying to rebuild their credit. You can sum up our conversations about secured credit cards this way: they will help you rebuild your credit score or establish credit history, but it’s going to cost you in the form of security deposits, relatively high interest rates, and fees.

To wrap up the series I wanted to use at least one post to discuss prepaid credit cards. Secured and prepaid credit cards have some things in common, but they also have some big differences.

What is a Prepaid Credit Card?

A prepaid credit card is basically a charge card. What does that mean? It means you open an account with a card provider and you deposit a certain amount of money into that account. The card provider gives a card with a credit card logo on it that acts just like a credit card. You can use it to buy things online, in stores – pretty much wherever credit cards are accepted.

But here’s the big difference between a normal or secured credit card and a prepaid credit card. When you use a prepaid credit card you’re actually using your own money. That’s different than a secured credit card because secured credit cards are actual credit cards with interest rates; they’re just secured by a cash deposit you made when you opened the account.

There are a few misconceptions about prepaid credit cards. One is that they help establish or rebuild credit. It’s not true. Prepaid credit cards don’t help your status with the credit bureaus because the card providers don’t have anything meaningful to tell them. Think about it – what would they say? “He successfully spend his own money until it ran out.”

I guess if you look hard enough you may find a prepaid card that reports to the credit bureaus, but it will be tough to find one.

The other downside I see in prepaid credit cards is they have fees. They’ll ususally charge between $5 and $10 to open the account and then there may be ongoing fees just to keep the account open.

What’s the Upside?

I’m actually not sure there is much of an upside. The only time I can think of that you’d be wise to open a prepaid credit card would be if you can’t get a checking account with a debit card. In that case it may be worth it to open one.

Wait – there may be one more circumstance where you might want to have a prepaid credit card. If you’re a person that has some fear about online shopping with one of your own credit cards or your debit card, a prepaid card gives you a credit card number to use on ecommerce and other shopping sites without having to worry about someone stealing your card and charging big purchases to it.

Secured Credit Cards are the Way to Go

I’d recommend that instead of opening a prepaid credit card, get a secured one instead. Your cash out of pocket will be basically equal, but the secured credit card will help you on your way to improving your credit score.

Secured Student Credit Cards

One of the best things that any college student can do is get a credit card. There are a lot of options out there where you can go get credit cards. Some of you might have some difficult history in your past when it comes to credit. That is fine because there are still avenues for you to take a look at. One of the best ways to improve your current credit is to go get a secured student credit card.

Next you want to see what type of interest rates you can get. Usually if you have had a bad past with credit, your interest rate is going to be anywhere from 15% and up to 25%. There could be an initial lower interest rate, but make sure you read all of the terms and conditions of the contract. Be aware that there can be changes very quickly in your contract with the interest rate. It can take them only a 15 day notice before they make a change in the APR and bump it up.

Prepaid Student Credit Cards

When you get a secured credit card, you need to decide what type of credit limit you are looking to get. It usually isn’t more than a couple thousand dollars as a possibility, but more than likely a few hundred dollars. Usually the deposit will be about the same as the credit limit, but it could be less or more depending on the credit card company. It might be 50% of the credit limit or it could be up to 150%. You should search around to find a secured credit card that will allow for a smaller deposit.

With these cards, you can build a lot of credit during your younger years. You need to make some improvements to your credit and getting a secured credit card can be a great way to get you back into good graces with credit bureaus. Also with the deposit you might find yourself taking more notice and responsibility for your credit then what maybe you have done before in the past. This could also be a good option if you simply have no credit history at all. Find a lot of options before you make a decision so that you are not caught with a lot of fees and high interest rates.

Another choice you can look at is getting a family member to cosign on a line of credit to get your foot in the door, if a prepaid student credit card appears to much for you to handle. If that doesn’t work out then look to work through a debit card with a checking account and start building a good recognizable history that way.

Canadian Student Credit Cards

Student credit cards in Canada are different from what you might find in America if you are a student going north of the border. There are some common traits that you will have to have whether you are in Canada or America. It is important that you establish good credit. The best thing you can do is build your credit. If you have none then there are some things that you can do to improve your situation.

First of all you can open a saving account and a checking account before you apply for student credit cards. These are great ways to get the ball rolling. This isn’t going to solve everything, but it will help start off on a good note. You can start paying your bills in college such as rent and utilities on this fund. This will allow for credit bureaus to see that you are good on paying your bills. Then it is good if you can get a store credit card from a clothing outlet that will allow you to build more value with credit bureaus. This is all in vain if you don’t pay your bills on time. That is the biggest thing you can do.

For Canadian students to get a credit card it will probably require an annual fee of some kind. The limits are usually around $750 and the interest rates are similar to those of American credit cards. They are usually around 15% or so. This is a good way for you to build a credit history during school. This can help you to eventually lower your interest rates and then be able to raise your credit limits higher. If you are struggling to get a card then you might have to get a cosigner. This is fine and can be a good way to make sure that you are taking care of that card because someone else is responsible with you. I would also ask advice from this person as to how to properly spend wisely with a credit card.

If you are having issues getting a credit card and you can’t get a cosigner then it would probably be good to go after a secured line of credit. This can be a good option for students that are struggling to get a credit history establish and are easier to come by. You will probably have to make an initial deposit equal to the amount of money you want to have as a credit limit. Whatever type of card you are able to get, build a first initial impression with the credit bureaus and your creditor so that they are able to offer your better rates in the future.

Low Interest Secured Credit Cards

Many people are looking for low interest secured credit cards to get themselves back on track. I understand why any person would want low interest rates, but at the same time I think it is kind of funny that you are entertaining paying interest rates on a credit card and missing payments after going through so much trouble and struggle with a credit card to begin with. It is almost saying I know that I am going to get punched in the face again, but then asking “Please, just not in the nose.”

My feeling is that I would look to make sure that you have a couple other requirements then just finding low interest rates. One of the best things that you can do is take the time to look at the issuing bank and how credible they are. Do they have a good history with credit bureaus?

You can contact credit bureaus and the Better Business Bureau to find out if they have an impressive history or not. Beware of low interest secured credit cards online, not all are legit just because they have a low interest rate. This will allow for you to find out if they report to the credit bureaus with your history with their cards and in turn will allow you to have a higher credit score if you take care of your payments on time.

Next I would be more concerned about application fees, processing fees, late fees, deposit requirements and any other type of fee they may make up. This is so important because this is really how a company can make a lot of money off of you even if you take care of your card payments. Some companies charge up to $200 or more just to get started and then more fees monthly or annually. This can take its toll on any person with bad credit.

With deposits you are going to be required to make an initial payment between 10% and 200% of the credit you will have available to use. For instance, say if the issuer decides you have to make a 100% deposit, then if you have a credit limit of $1,000 you are expected to make a $1,000 deposit. Some can be greater than that. It becomes kind of silly, but there will be a price you will have to pay in order to turn your credit around.

Usually I have seen rates between 10% and 20% on a usual secured credit card. You may see lower, but I suggest that the lower the interest rate is with your secured credit card then the longer you should read the terms and conditions. The rates on low interest secured credit cards can leap drastically after six months or one year. Some will have an accruing interest rate that you don’t have to pay off until six months. These are all techniques that are done to allow for you to have time, but also can cause you to procrastinate easily and find yourself in a terrible position financially after several months.

I suggest that you are careful about your choices. You are better off getting a card from a well known bank with higher interest rates then low interest secured credit cards online. Some don’t have credibility and honestly aren’t looking out for your best interest. No pun intended.

Secured Credit Cards in Canada

We share the same language, the same name for our currency, we even share a few professional hockey and basketball teams. Why wouldn’t we share similar financial problems and solutions?

After a tough financial stretch, people are just as likely to be looking for secured credit cards in Canada as they are here in the US. Canada has similar bankruptcy laws to those of the US and the same credit bureaus monitor a person’s management of their debts. That being the case, a secured credit card in Canada will be just as useful for improving credit rating up there as down here.

Here is a short list of companies in Canada that provide secured credit cards:

1. Capital One Bank

The capital one website doesn’t say much about its terms other than the fact that your credit limit will be determined based on your credit score. No mention of interest paid on the security deposit, so I doubt they pay any.

2.CIBC

CIBC seems to offer similar terms as the others with one exception. They only let you apply for a secured credit card at a local branch of the bank.
3. Home Trust Bank

Requires a minimum deposit of $1000, but can go up to $10,000. They pay no interest on your security deposit, and charge a $7.50 monthly fee. I looked over their terms and conditions and these guys seem a little steep on their fee structure.

4. Horizon Plus

This card requires a minimum deposit of $500 and pays 2% annually on that deposit. They also charge a monthly fee of $5.95 to keep your account open.

These companies will have a fairly simple application process and you’re highly likely to get approved. After all, why wouldn’t they approve you when they have your cash securing the line of credit they gave you? In fact, getting secured credit cards in Canada for people with bad credit is pretty easy. You can get a credit line of up to $10,000 (if you’re willing to put down a $10,000 deposit).

The game is the same in Canada as it is in the US – open a couple of secured credit cards, and put a balance on them every month. Make sure it’s an amount you can manage and pay off before the payment is due. The credit bureaus on both sides of the border need to see you use the credit card intelligently. That means no late payments! Don’t risk making your credit score even worse!

The Best Secured Credit Cards

It is difficult at times to find out what type of credit card is going to be good for you. If you have had problems with credit in the past then you are obviously trying to find the best secured credit cards or the best partially secured credit cards that will allow for you to build your credit back up, but at the same time they save you from the headache of having to deal with so many fees, high interest rates, and large requirements for deposits.

Many people ask are secured credit cards bad for your score? I don’t know the logic behind it because they are intended to do the opposite, but here are two possible ideas:

1. Most of the people that have bad credit scores are only able to get secured credit cards with high interest rates or a trade off of high fees. Then there must be an association between the two.

Well this is silly because really a secured credit card is like a bicycle with training wheels that will allow for credit holders to build a great deal of trust with credit bureaus. It is like grown up timeout. I think that most people get scared because these cards represent failure of some kind, but bad things do happen to good people. There is a better chance to repair your credit with the best secured credit cards and the best partially secured credit cards.

2. There are so many scams out there in the world today. I am afraid that of a bad credit card company that requires me to call a “900” number and then charges me an arm and a leg for even having the card.

There is some truth to this. There are certain card issuers out there that don’t report to credit bureaus and this will create no credit and keep you static. This isn’t what you want because your application fees, deposits, or possibly high interest rates are not worth it because you are not able to redeem yourself with the watching eye of the credit bureau big brothers. Make sure that your company is reporting to the credit bureaus. You can contact credit bureaus personally to find this out or just the Better Business Bureau to make sure that they are on the up and up.

Now understand that you will probably have to make some level of a deposit (around 100% of the credit you are looking to have available) and be ready for application fees or a trade off of a high APR. You probably want to try to avoid application and processing fees, which are cute ways to make more money off of the little guy, and go for a large respected bank like Bank One or Bank of America and get a small annual fee with decent interest rates. Honestly the best secured credit cards are the ones that you pay off on a regular basis and avoid maxing out.

Secured Credit Cards for Business

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This is an account from a business owner that I spoke to that gave me some tips on how he was able to get a secure credit card for his business so he could rebuild his credit. He was concerned because he had heard how important credit was for starting a business, but he wanted to create financial independence. This is his experience with secured credit cards for business:

I was going to buy media for my internet marketing business, but I was nervous because I had several occurrences where I had destroyed my credit. Some of these reasons were my fault and others were circumstances that I couldn’t control. I had gone through a bad divorce that had taken a toll on my credit.

So now I knew what I had to accomplish with my business, but I was scared of where to go to find a card that would accept me. I had some funds to help me get my business going, but I realized that I was going to need to leverage on a grander scale. It was going to require more leveraging and being able to exercise what little credit I had.

I realized that this was going to take some good credit history to replace previous mistakes. I knew that there was going to be forgiveness, but I had to prove myself to credit bureaus. I realized that a prepaid credit was a decent option. I searched around and found a company that offered secured credit cards for business. This company seemed legitimate and wasn’t requiring me to pay an arm and a leg with fees and phone minutes to sign up.

I was even more pleased as they asked me for my credit report to find out how my credit history was. This was assuring to me because it showed that they were serious about what they offered and I found out they would report often to credit bureaus about my new established history.

This became a dream come true because I could leave a larger deposit and receive a larger credit limit. I started using the line of credit often and made payments on time. Some times I would make more than one payment a month. It didn’t take long for my credit to be flipped around. Now my credit is well over 700 after being in the pits and I am able to get unsecured credit cards in a matter of months. I am going to try to build my credit more so I can get larger limits. I used to be scared about credit cards after I had bad experiences. Now I have been able to turn it around into my favor and use it to better my life.

Secured credit cards for business can be so beneficial for people with struggling credit. I like to think of it as almost paper trading, or maybe trading on a contract that is only 5 dollars. It is a conservative way to exercise your ability to use credit correctly. After a while you will learn how to use it wisely and be able to adjust it to become one of your strengths and not your weakness.