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.

Low Limit High School Student Credit Cards

To be honest the idea of high school kids running around with credit cards should probably make us all a little nervous. Teenagers aren’t known for their foresight or restraint are they? No, they’re not. They’re known for seeking excess. I’m not saying it’s such bad thing. Teens need to spread their wings a little, rebel a little.

So when we think about the right way to ease kids into the world of credit cards, we want to make sure they have that sense of freedom without giving them the chance to get a headstart down the road to financial ruin.

When I got my first credit card I was 18. I was financially clueless. I was clueless in everything else too. But especially financially. A good friend and mentor advised me to get a credit card so I could establish credit history and get a decent credit score while I was still young. He also advised me to keep the limit low. This was his advice:

“Get a low limit credit card. Everyone screws up and maxes out their credit cards at least once in their life. You’re better off doing it with a $500 credit limit than with a $5000 credit limit.”

He couldn’t have been more right. Sure enough, I maxed that credit card out soon after I got it. Luckily it was only $500 worth, and I only had to see one finance charge on my statement to realize I didn’t want to misuse credit cards ever again. I’ve made my mistakes since then, but I’ve never forgotten the lesson learned from my first credit card.

For parents who want to give their teen an even safer credit learning tool, there are prepaid credit cards. In a sense, it’s not a credit card at all. It’s a charge card. What that means is you load it up with whatever amount of money you’re okay with your teen losing, and then let them experience making purchases with the plastic.

If nothing else, using a prepaid credit card should teach kids that credit cards are ‘real money’. In other words, you may not take the cash out of your wallet and hand it to the cashier, but it’s money you’re responsible for. When you run out of money on the prepaid card, the card is useless. That’s a great thing for a kid to get used to. It should help them understand that credit cards are a tool to be used intelligently.

Apply For Student Credit Cards

One of the best things that any student can do is to go out there and get a credit card. I think that many students fail to establish credit early and then by the time they are adults they have been spending only with a debit card and not able to buy a house or a car. I think that it is in your best interest to get a card going as soon as possible. If you are having issues then get a parent or an older sibling to cosign for you. This can be a great way to start off on a good note. If they are careful with their credit then they will teach you how to use the card correctly. Respect what they have done for you and use the card wisely.

Also you should open a checking and a savings account. This can help any credit company take a look at what you are doing with these accounts and how you spend money. This could be a great source to get a credit card from when the time comes. Also a lot of teens are offered store credit cards from clothing apparel chains like American Eagle, Buckle, Abercrombie, etc. These are also good ways to start establishing good credit. Now this could be scary for some of you because you spend money at places like these like a crazy person (this is specifically for the women). So I suggest you don’t spend anything on that card, which you can’t go without. Make sure that you have those funds in a checking account. Don’t start playing the game of making payments with a credit card and hoping money will fall from the sky.

Apply For Student Credit Cards Online

One of the easiest things you can do is get a credit card online at a valid banker. Be careful that some third parties are scams, but many are clean vendors for these major companies that allow for these big companies to spread their wealth on the Internet. Make sure that they are truly associated with a major credit company and then you could potentially find cheaper rates this way.

If you do apply for a credit card online, make sure to have an adult there the first time. This can be good because they will be able to help you know what to look for with a card. You can find cards without having to worry about annual fees, low APRs (not just initially) and unsecured cards that don’t require an initial deposit equaling your credit limit. Be smart with your choices and you will build a strong initial relationship with credit bureaus.

Credit Cards for Students in the UK

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Students in the UK need to establish credit history as much as students in the US. Far be it from credit card companies in the UK to pass up on this lucrative market. Here is a quick review of three cards you could pick up while you’re away at university.

Barclaycard Student Credit Card

Barclaycard is a well known credit provider in the UK. Their student credit card offers some decent benefits, but before you apply they want you to fit a few qualifications:

• Credit history without major blemishes (as in bankruptcy or multiple missed payments on credit lines).
• You can’t be a current Barclaycard credit card holder.
• You have to have a permanent address in the UK.
• You have to be at least 18 years old, and you you have to be heading into college.

If you meet those requirements, you should apply and you’ll be entitled to some good benefits. They offer 20% discounts with certain retailers, 2 for 1 leisure vouchers (not sure what that is), and prize draws for cardholders.

Their interest rates are reasonable – coming in around 14.9%.

Graduate Barclaycard Credit Card

They’re looking for you to have all the same requirements as the normal student credit card, but they also want you to have at least 10,000 pounds annual income.

If you qualify, here are a few benefits:

• There’s no annual fee.
• They offer fraud protection.
• Purchase Delivery Protection which ensures your mail order or online purchases against loss or damage until they get to you.
• Online account management.
• Text notification of payment due dates (if you want them).

This isn’t a bad card for the graduating student to pick up as you leave college and enter the workforce.

Natwest Student Credit Card

A prominent UK credit provider gives students a great offer for what may be their first credit card. Here’s a brief summary of the benefits:

• Great discounts with online retailers.
• A grace period that may last as long as 56 days.
• Daily cash advance limit of up to 300 pounds.
• No annual fee.
• Use your card worldwide when you travel.

The final benefit I see is they offer a maximum credit limit of 500 pounds. This will keep you from getting yourself in trouble while you’re working toward your degree.

Which reminds me, I have a few recommendations for any student getting a credit card. The most important one is to understand what a credit card is, and what it isn’t. A credit card isn’t free money. They’re going to make you pay them back, and if you’re late or if you even carry a balance your best case scenario is paying high interest rates, you’re worst case scenario is paying high interest rates and high fees. Sounds good right?

It doesn’t have to go that way though. You can use the cards wisely and your credit card will be your best friend. Enjoy those rewards!