PREPAID CREDIT CARDS – A prepaid credit card is actually more like a debit card. It involves paying an amount of money into an account that is linked to a prepaid credit card. Then, as you use the card to pay for purchases, the amount you spend is deducted from the total in your account. When you use all of the funds in your account, you can't use the card until more money is deposited into the account.
Most prepaid credit cards are established through a credit company or retail store. Banking institutions really don't have the need to offer prepaid credit cards since their bank cards attached to a customer's checking or savings accounts functions in the same manner. Most prepaid credit cards will charge a small fee for setting up the account in the beginning, but check their policy for any additional fees so you know the cost before you set up an account.
Another thing to consider when wanting to set up a prepaid credit card is deposits. Some companies require you do a direct deposit while others let you make deposits as desired. You will also want to know how quickly a deposit is credited to your account. You don't want to deposit money expecting it to be available immediately if the company takes 24-48 hours to process a deposit.
What’s the benefit of using a prepaid credit card? A prepaid credit card can be good for helping you to keep track of expenses and stay within budget. However, if you are looking to improve your credit it probably won't help with that. Since there is no credit limit or monthly billing, there is nothing to report to a credit bureau and thus your credit score is not affected by a prepaid credit card. The only exception to this is if the company issuing the prepaid credit card reports your activity to the credit bureaus each month. If you are trying to establish your credit or rebuild it then be sure to ask whether or not prepaid card activity is reported.
SECURED CREDIT CARDS – A secured credit card is often thought of as the same type of credit card as a prepaid. In fact, the terms are not interchangeable. A secured credit card is actually a type of credit card. It is most often used for people with no credit history or with a bad credit history. A secured credit card is one in which the cardholder has to pay a security deposit up front to obtain a credit card. This security deposit is held as collateral against the credit card in case the cardholder does not pay the monthly bill. In this way, the cardholder gets use of a credit card and builds or rebuilds their credit while the credit card company has some "insurance" to cover the risk they are taking in offering credit to an unknown credit risk or a person known to have poor credit.
When opening a secured credit card you want to look for one that has a low fee or startup costs; this will allow you to use more of your available funds towards the security deposit. Next, you will want to look for a credit company that places your security deposit in an interest bearing account. You don't want your money to just sit there; it might as well be making interest if you can't spend it. You will also want to find a secure credit card with the highest credit limit possible. Some cards will set your credit limit equal to the amount of your security deposit. Others will only give you a credit limit equal to a percentage of your deposit—some as low as 50% of your deposit.
Be sure to pay your bill on time each month and pay as much as possible. At least try to pay more than the minimum amount due. This will not only save you on finance charges but will help in improving your credit score. A secured card will not improve your credit history if you pay the bill late or are constantly at the credit limit each month. If the purpose of obtaining a secured credit card is to establish credit or improve your credit history, then you want to concentrate more on using the card responsibly than on racking up large credit debt. Responsible use not only can improve your credit but after six months of good use you can often request and receive an increase in your credit limit.
