Posts tagged: credit_cards_secured

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.

Compare Secured and Unsecured Credit Cards

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The credit card industry is one of the biggest, most competitive, and most profitable out there. Credit consumers today have more options than ever and there are a lot factors t to evaluate. One of the first questions is whether to get a secured or unsecured credit card. Some people may not think the choice between secured and unsecured credit cards is a tough one, but it’s not as simple as you might think. There are several angles to consider, but first let’s look at the basic characteristics of both types of credit cards.

Secured Credit Cards

Easy approval, often guaranteed. Great for building credit score and history, or rebuilding after bankruptcy.Requires a security deposit, usually equal to the amount of the credit extended. Often carries a monthly fee to maintain the account. Typically charges high interest rates on purchases, 21% and above.

Rarely offer balance transfers.

Unsecured Credit Cards

Approval based on credit worthiness (score and history). Good for improving your credit if you use them wisely. No security deposit required, limit determined by credit card company (depending on credit score and household income). May or may not charge an annual fee to maintain the account. Cards with rewards such as sky miles often carry annual fees. Interest rates on purchases can range from 9.9% to 21% or more. Often offer balance transfer options with promotional interest rates. It’s obviously easier to get unsecured credit cards with fair credit, and you’d probably rather not have to put down a security deposit.

Basically, unsecured credit cards are the better tool in the long run, but that doesn’t help those people that have bad credit and need some credit now. My advice is that people should get unsecured credit cards with low rates, no annual fee, and a rewards program if possible.

If it’s not possible to get an unsecured credit card, shop around for the best possible rates and try to avoid fees whenever possible. Use the secured credit card wisely for several months and soon you’ll probably get offers from companies for the unsecured variety.

When you get those unsecured credit card offers, look for one with a well-known company and one that offers a low or 0% introductory interest rate for at least six months. That way you get the benefit of using their money for ‘free’ until the promotional period ends. Make sure you pay the balance monthly!

Secured Credit Cards for a Small Business

Credit cards can be a business owner’s best friend. They make it possible for you to pay your monthly expenses without having to drain all your cash. Not to mention you can earn rewards like sky miles just by running your normal business costs through a credit card. But what if your business hasn’t established much credit? Or worse, what if you had some credit cards, but you fell on tough times and your credit was damaged?

Secured credit cards for a small business can be the solution. These cards offer the same credit building benefits of secured credit cards geared towards individuals, but there are some differences.

A good example I found is the Wells Fargo Business Secured Credit Card. Here is a general outline of their offer (taken from their official site):

You can get up to $50,000 in credit extended to you as long as you have an equal or greater amount deposited with the bank.

The interest rate isn’t too high; 9.9% on purchases you make (pretty good considering I’ve seen some with interest rates as high as 24.99% on purchases).

Wells Fargo will even pay you 2.5% on your security deposit for the first year you have the account with them, but after one year it drops to 0.5%

I looked for other offers for small business credit cards secured by deposits, and I couldn’t find too many. Why do you suppose that is? Here are a few ideas I came up with:

Applicants probably won’t have enough cash on hand to put down a big deposit. The deposit is something the credit provider can earn interest on, not to mention it allows them to give higher lines of credit, which pays them higher fees.

The see business that need secured credit cards as too much hassle to work with. Think about it, most businesses fail anyway right? Why would they want to provide a line of credit to a small business that either has no credit or has had a bad experience with credit in the past? Better to offer credit cards to established businesses that will keep the card open for years to come.

Secured credit cards must not be as profitable. After all, we’re talking about credit card companies here. They go where the profits are.

Based on my research, I’d say the Wells Fargo Business Secured Credit Card is the way to go.