“No Credit” Credit Cards: Are Prepaid or Secured Cards The Way To Go?

November 29, 2009 by Millie Kay G.

A young lady I know would like to make online purchases, but doesn’t have a traditional credit card or bank account yet. Someone else might have poor credit and be unable to qualify for a regular Visa or MasterCard. Or a student you know may want to have a way to pay for books and necessities while in college.

“No Credit” Credit Cards To The Rescue?

For people in these situations — those who have no credit or are still working to build their credit history — certain types of credit cards may help. A lot of people start off with a prepaid or secured credit card which can be used in place of traditional credit cards, whether it be at stores around town, online purchases, or for monthly bills.

So what do these types of cards offer? You can consider them to be credit card “training wheels” so to speak.

Secured Credit Cards To Build Credit

Secured credit cards are cards that extend you a line of credit based on some amount you deposit with the card issuer. These cards will often have a set limit that may be increased by additional deposits or by maintaining a good payment history. These cards are a great way to build credit for those who have no credit (or have bad credit). Some popular examples:

List of Secured Credit Cards
 

 
These sites have pop up windows:

When you need to (re)build a good credit history, you’ll need a secured credit card that’s reported to the credit bureaus. Check with the creditor, because not all (although most) companies report their accounts to the credit agencies. If your credit standing is good, some banks might be willing to convert a secured credit card into an unsecured account. Ask your creditor if that’s an option for your secured card.

To stay on the safe side, the FTC warns those looking for secured credit cards to watch out for scams. In particular, avoid offers that involve calls to 900 numbers and promises to fix your credit, which can be exorbitantly expensive. You can repair bad credit on your own by establishing good credit management skills and by managing your debt responsibly.

A Look At Prepaid Credit Cards

Prepaid cards function somewhat like debit cards: hence they’re given the name “prepaid credit” or “prepaid debit” cards. They work by having the cardholder deposit some funds into an account — funds which can then be drawn against when the card is used. Here are some popular examples:

List of Prepaid Credit Cards
 

Note that ordinary debit cards are typically linked to your bank account and aren’t intended to help you build credit. On the other hand, prepaid cards are reloadable cards with their own accounts and may, in some cases, be used to help you establish credit. They can be a way for teens, students, and other spenders to learn money management skills without having to juggle cash (or lose it, as is often the case for me). You’re limited to spending only up to the amount you put into your prepaid card account.

Prepaid credit cards are also available through many retailers now — you can buy them in certain denominations and use them like gift cards or prepaid phone cards. Supposedly, prepaid cards have become popular in part because consumers want to avoid overdraft fees on their checking accounts, which can be as high as $35 each instance.

Before signing up, check on the fees incurred by using such cards, such as an activation fee you may need to pay.

Be Aware of Credit Card Fees & Charges

Although these cards can be a convenience, you should watch out for fees and charges before signing up. These fees can range from monthly to annual fees, ATM fees, or even fees for making purchases. Another charge you might run into is an application or activation fee.

I would carefully read the terms and conditions for any card I’m interested in, prior to handing over an application. Given that these cards are usually intended for those with less experience with credit or are just starting afresh as cardholders, new customers should make sure that they can handle the payments and interest rates for these cards. Note that APRs can change for a variety of conditions, such as a late payment or failure to pay.

If the fees for your prepaid cards or secured credit cards are too much to handle on a monthly basis, it might be worth the time to investigate alternatives like a debit card that’s linked to a high yield checking account or high interest savings account with a bank or credit union.

Whichever card you select, make sure you use it as an effective financial tool that can help you (and not hinder you).

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