You may have heard about Secured Credit Cards and Prepaid Credit Cards.The concept of both cards seems quite similar, you pay a certain amount of money ahead of your purchases, and then use the cards. But why are there these different types of cards? Is there a difference? Yes there are. These are the details:
- Prepaid Debit Cards - Prepaid debit cards descended from secured credit cards that you are probably heard of. First of all, prepaid debit cards are just simple debit cards, that carry usually the Mastercard or Visa logo, and which are accepted worldwide. Similar to your regular debit card they deplete money in your account by your transactions. There are no monthly payments, as the money is already in the account as it is prepaid, and best of all there is no interest on these cards.
The big difference is what is needed to qualify for such a card, and how much it cost to use it. Prepaid debit cards do not need to qualify for bank credit checks. Issuers usually do not verify employment, credit, or even the addresses and the legal residency. Therefore these cars are very popular among the population of illegal immigrants in the USA.
The drawback of these cards are are much higher fees than traditional secured credit cards. This is the price people have pay for convenience and anonymity. These cards will not report cardholder transactions to the credit bureaus. Therefor you can not build credit with such a card!
In the US is impossible to live without some type of Visa or Mastercard. Debit cards fill this void. They offer a simple "de facto" banking system for those unable to qualify normally. They offer direct deposits for paychecks and many other features to a segment of society that traditional banks have left out in the cold.
- Secured Credit Cards – are credit cards that are specifically designed for people with bad credit. Most people that apply for these types of credit cards do so to build or rebuild their credit. The other advantages are they appear, look and act exactly like a regular credit card. Most prepaid cards are clearly marked as debit cards.
The price you pay for rebuilding your credit is interest. The bad thing is that you are paying interest on money you have! Unlike prepaid debit cards, secured cards usually carry pretty steep interest rate, usually around 20%. Secured credit cards are not usually "re-loadable". Meaning, once you make your initial deposit this becomes your "credit limit". Your payments will bring down the balance giving you more purchasing power.
Secured credit cards report to the credit bureaus exactly the same way a regular credit card does. Creditors that review your credit for purchases have no idea if your credit card is secured or not. Another thing to watch is that most people will fund their cards with money that they intend to use immediately. Meaning they send in $500 and expect to be able to go out and spend that $500 immediately on receipt of their card. This is not good borrowing practices and will actually bring down your credit score.
Credit cards are viewed as liabilities on your credit bureau once you borrow over half of your credit limit. The credit bureaus see this as a sign of credit dependency and discount your credit score 35%. When this happens you are hurting your credit, paying regular credit card fees, paying interest on your money and carrying around a maxed out credit card.
Our advice to borrowers is to save up enough money so that your initial deposit is large enough to show a decent credit limit on your credit bureau, around $1000. Then leave it alone. It will only cost you the price of the annual fee to keep it in their bank. Most people feel the need to charge something on the card to "prove" they can pay it back. This assumption could not be further than the truth. Credit bureaus do not show monthly payments; they only show the months you have had the account open and any months that you have been delinquent.
When a future creditor sees your $1000 open line of credit, higher credit scores and the financial restraint you have demonstrated you will be much more likely to get the loan. Secured credit cards can significantly help you rebuild your credit and have a positive impact on you overall credit score. Unfortunately most people use them incorrectly and end up hurting their credit more than it was before getting the card.
