No Credit Credit Cards

Consumers with no credit or extremely poor credit have a limited number of options available if they wish to re-build their credit to qualify for regular credit cards again. There are basically two types of credit cards available:Pre-paid cards and secured credit cards.

Pre-Paid Cards versus Secured Credit Cards

Consumers with poor credit often utilize prepaid credit cards or secured credit cards. But prepaid credit cards aren’t like using secured cards and come with a variety of conditions and costs which secured cards don’t incur. Many people ask the question, “What’s the difference between having a prepaid card, a secured card and cash?” The answer is, in certain circumstances, a prepaid card or secured card can be a little more helpful than just handing over cash.

Prepaid Cards – Analysis

Placing money into a prepaid card account can be done over the phone, on the internet, or by a third party. Most prepaid cards come with up-front costs as well as service fees. Since the credit limit on the card is set at whatever the balance in the account happens to be, there’s no over limit fees. As long as the cardholder is aware of the balance, they shouldn’t be embarrassed at the check-out line by having the card denied. Some prepaid card companies charge a transaction fee, per transaction; others charge it for a certain number of charge transactions.

Basic Benefits of a Prepaid Credit Card

Prepaid card providers have a variety of benefits offered to clients, including:

• Free Direct Deposit
• Pay rent, utilities and other bills online or over the phone
• Track spending with online budgeting tools and alerts to mobile phone
• No credit check or bank account required
• Some cards offer rewards programs for purchases
• Use everywhere Visa, MasterCard debit is accepted
• Prepaid credit card is not attached to a bank account; if lost or stolen the bank account is safe

Secured Cards – a Review

When a bank or credit union offers its customers a secured credit card, what are they really offering? A secured card is a real credit card, but it has a balance of money which is held as “security” against the card’s purchases. Unlike pre-paid cards, where the money from the account is instantly deducted and deposited into the seller’s account, this card makes a “credit” transaction occur. The balance in the account is not used to pay for the transaction; a credit is established with the card provider which is later paid by the cardholder. Pre-paid cards act more like a gift card with cash available. For this reason, secured cards are a great way to re-build credit.

Basic Benefits of a Secured Card

• Use of a secured card is limited to an established credit limit, preventing the consumer from racking up a large amount of debt and being charged higher interest, late fees, or other fees
• It doesn’t take great credit to have a secured card
• Some cards offer rewards programs for usage

Some Bad News about Secured Cards

There are several potential problem areas for secured credit card users, including:

• Overdrafts – A purchase may still be authorized, however, the bank will assess an overdraft fee which in some cases can run as high as $35. Consumers can receive multiple overdraft fees if they make several purchases when they have insufficient funds.
• Theft or Loss protections – A card holder’s liability is normally only $50 if they notify their bank within two days of discovering fraudulent charges, however, after two days, the liability increases to $500 and can go up to the entire account balance after 60 days.
• Weird fees – Some banks are now charging over-limit fees or non-sufficient funds fees based upon pre-authorizations, and even attempted but refused transactions by the merchant (some of which may not even be known to the cardholder).
• Loss of funds – Since secured cards are typically linked to bank accounts, if a debit card and PIN number is stolen, the entire bank account could be drained of funds.

Which is Better? Prepaid or Secured?

The best answer is “both”. Depending upon a card holder’s situation, either card can be a significant help – particularly when the user is dealing with a “credit card” only type of transaction. These transactions occur with hotels, rental cars, airline tickets, and other types of purchases involving travel. Please note, in some cases, a secured or prepaid card will require additional money on account as these vendors tend to “reserve” funds from the account in case they need access for additional charges and expenses by the customer. In other words, a hotel might charge the card for a room, but it will also “reserve” more money than the room charge for meals, additional nights stay, parking fees, internet usage, and in-room movie charges. Consumers should understand the hotel’s “reserve” policies and amounts in advance of providing card information.

Catch-22

It’s a major Catch-22: in order to get new credit, you need to have a positive credit history. You can’t establish a positive credit history until you acquire some new credit. For college students, individuals starting their first job, divorcees and others, getting that first line of credit is exceptionally important. Fortunately, there are no credit credit cards specifically designed for individuals to establish a solid credit history.

Secured Credit Cards

Secured credit cards will require that you make a deposit. In most cases, your credit limit will be equal to the deposit you make with the company, but in some cases they will raise that limit after a history of on-time payment has been established. Unsecured credit cards, while they do not require a deposit, often have higher fees and greater interest rates than their secured counterparts. However, if you pay your bill off in full each month, these can be a great way to build your credit without having to make a large deposit.

No-Credit Credit Cards

“No credit” credit cards help establish a good credit history by providing you with the opportunity to prove that you can make timely payments consistently. They also provide the means to prove that you can manage your credit and not overextend yourself. Remember, you will want to keep your balances low on these cards, charging no more than 30% of the balance of the card. By keeping the balance low, and making on-time payments, you’ll see your credit scores start to improve.

Be Careful and Pay Attention

It only takes one late payment or one over-limit notation to ruin your progress, so you must pay attention to payment due dates and stay well within your limits. Most of these cards allow you to set up alerts that will warn you when your balance reaches a certain point, and many also allow you to pay your bill through an automatic bank draft. If you take advantage of these features, you won’t have to worry about late fees or going over your limit.