Secured and Prepaid Credit Cards

Pay before you play

Most people who have no credit history, a bad credit rating, or who have declared bankruptcy may find it very hard to get a credit card company to issue them a card. This is because card issuers and banks decide on whom to give a credit card based on the potential risk of the applicant. If you don’t have a history of responsible credit, you may be declined.

However, all is not lost as you will probably be able to get your hands on a prepaid or secured credit card without having a good credit score or history. These cards can actually help you build up credit history or repair damaged credit ratings.

Prepaid Credit Cards

A prepaid credit card basically works exactly how it sounds as it is funded by the  cardholder instead of the bank. Regular credit cards are actually paid off by the bank, and then you repay the loan over time with an added amount of interest. There are no interest or late payment charges with a prepaid credit card as the cardholder has already placed money into the credit account, and it is this money which gets spent.  There is never a balance due. However, some companies and banks may charge an activation fee, monthly fee and cash withdrawal fee.

Of course, to be approved for one of these credit cards, you will need to have the money up front. With this type of credit card you can usually put more money into the account, in person or online, when the amount starts to drain. A prepaid credit card is good for people who seem to have problems spending too much, as you can’t spend what you don’t have with one of these cards. Many of these cards also offer rewards programs.

Secured Credit Cards

Secured credit cards are similar to prepaid versions as you are required to deposit the money up front into a bank account to be used as collateral against your credit line. These cards usually come with limited benefits and services; however, they are often complex to set up and generally have higher fees than other types of credit cards.

The amount of money you are required to deposit may range from a few hundred dollars to several thousand. The credit line is a percentage of your deposit, usually between 50 and 100 percent. Most banks will pay interest on your deposit, but you will probably have to pay application and processing fees. Before applying for a card, make sure you ask what the fees are and whether they will be refunded if you’re not given a card.

Home-secured Credit Cards

A home-secured credit card is linked to a home equity line of credit. When you use the card, it's similar to taking out a mortgage and using your home as collateral. These cards are considered to be very risky as you could possibly lose your house by foreclosure if you fail to pay the bills.