It is important to understand that all plastic is not created equal. Because of this fact many consumers become very confused when trying to choose which type of credit card is best for them. Consumers with no credit or bad credit really only have 3 options to consider when deciding which credit card is best for them: the prepaid debit card, the unsecured subprime credit card, or the secured credit card. Here are a look at the pros and cons of all 3 card types.
Prepaid Debit Cards
When a consumer purchases a prepaid debit card she has the ability to load her own funds directly onto the card. The cards are relatively easy to find - they are available at gas stations, retail stores, and Western Union stores - and literally anyone can purchase them. A consumer does not fill out an application to receive a prepaid debit card, she simply buys it. Once the card is purchased and loaded with funds, it acts just like a gift card. A consumer can use all of the funds available on the card (minus any fees) and then either reload the card or trash it.
Although prepaid debit cards are easy to find and even easier to obtain, there are plenty of reasons to think twice before choosing to use a prepaid card. First, prepaid debit cards do not offer any credit building opportunities for consumers. Why not? The reason prepaid debit cards offer zero credit building opportunities is because prepaid credit cards are not included on credit reports. Ever. Period. If you have heard differently, you have heard wrong. Additionally, prepaid cards do not offer the same fraud protections available through traditional credit card accounts. If a consumer has a prepaid debit card stolen which was loaded with $200 then it is as if she just lost $200 in cash. Finally, although prepaid cards do not offer fraud protection or credit building opportunities, they can still be loaded with fees.
Unsecured Subprime Credit Cards
Another plastic option which is available to consumers with no credit or damaged credit is the unsecured subprime credit card. Unsecured credit cards are the most common type of credit cards. They must be applied for, an approval must be granted, and (if a consumer is approved) a credit limit is assigned to the account. Unlike prepaid debit cards, unsecured subprime credit cards do offer credit building opportunities since they typically report to all 3 of the major credit bureaus each month - Equifax, Trans Union, and Experian. Plus, if a consumer is approved for one of these accounts, she does not have to put down a large deposit in order to secure her new line of credit.
Unfortunately, the primary draw back when it comes to these types of credit cards is the fact that they are usually loaded with high interest rates and incredibly high fees. It is not uncommon for an applicant to be approved for an unsecured subprime credit card only to receive a card which is practically maxed out as soon as it is issued due to all of the initial fees associated with opening the account. CLICK HERE to read more about how high balances on credit card accounts are bad for credit scores.
Secured Credit Cards
The best option for consumers with bad credit or no credit is, without question, the secured credit card. Secured credit cards, like unsecured subprime credit cards, offer great credit building opportunities when managed properly. However, secured cards typically offer this credit building opportunity without the often astronomically high fees associated with unsecured subprime credit cards. They are actual credit cards, unlike prepaid debit cards, which usually report to all 3 credit bureaus.
When a consumer is approved for a secured credit card she is required to make a deposit with the issuing bank which will be equal to the credit limit on the card. For example, if a consumer makes a $300 deposit then she would receive a secured credit card with a limit of $300. The deposit, however, is not the same as loading funds onto a prepaid debit card. If the consumer charges $25 on her secured credit card then she is responsible to pay the funds to the bank as they are not merely deducted from her initial deposit. Secured credit cards also typically offer very easy qualification standards so it is relatively easy to qualify for a secured card even for consumers with no credit or damaged credit.
How to Choose
Regardless of which type of plastic you choose it is important to do your research first. Comparison sites like GreatCredit101.com allow consumers to view the rates and fees associated with multiple cards before they ever apply for an account.
Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.