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Should you go with prepaid cards or secured cards?

Tuesday, July 17, 2012 at 11:57:53 AM

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If you've experienced difficulties in dealing with credit in your past, you might have seen your access to new credit cards restricted considerably. As a consequence, you likely have limited choices when you apply for a new credit card.

In many cases, those with low or no credit usually only have two choices when they want a card that will give them greater financial flexibility: prepaid debit cards and secured credit cards. However, the difference between the two is not always necessarily clear at first glance, and therefore you will need to closely look at any secured credit card application form to determine why this kind of card can be more beneficial to you than a prepaid account.

Basic features of secured versus prepaid cards


he basic thing to remember when comparing prepaid and secured cards are the types of accounts they are. Prepaid cards are debit accounts, meaning that you have to put a certain amount into them, which you then subtract from every time you make a purchase or are hit with a fee. On the other hand, secured credit cards can have the balance added to or subtracted from over the course of time, as long as you stay within the predetermined credit limit.

The reason the difference between these two account types can become a little unclear at times is because secured credit cards, like prepaid debit, come with no credit check, and require a down payment when the account is first opened. However, in the case of the secured card, that amount is only used to set the credit limit on the card. This means, for instance, that if you pay $300 dollars when you open the account, that's the maximum amount you will also be able to borrow at any one time.

There are other differences too. For instance, though you can use both to make purchases, prepaid cards can be used to get cash from ATMs - though this usually comes with a fee.

Rebuilding your credit? Choose a secured credit card

Most importantly to consumers who are looking to rebuild their credit standing so that they can someday gain access to the best credit cards on the market, prepaid debit cards have no effect on your credit rating. Meanwhile, most secured credit cards will. The key when examining a number of secured credit card applications will be to determine whether the account you want to open is reported to the credit monitoring bureaus. This is the only way you can use one of these card types to reestablish your credit history, or start it for the first time.

What to watch for when using secured cards

The important thing to keep in mind when using a secured credit card is that lenders will consider you a possible risk because of your lack of a healthy borrowing history. As a result, they will impose higher interest rates and fees on this type of account than you may have been used to in the past, as a means of reducing their exposure. This means that when you carry a balance, for instance, you will likely pay more for doing so, and there will typically be an annual fee associated with the account, which you will have to plan for.

The key to successfully managing a secured account is keeping your balances low and, due to the high cost often associated with it, planning to use it only to re-establish your standing, then finding more beneficial credit card applications online when your rating has been repaired.

Before you apply

Before you apply for any credit cards there are some good practices you should be familiar with before you fill out the form. In short, the information should be accurate, current and honest. For more specific tips about what to consider as your do the paperwork, see our article How to fill out credit card applications.

Finally, there is no need to apply for multiple cards with the intention of keeping only one. In fact, this could trigger inquiries on you credit report and actually hurt you chances for being approved for the card you really want. Online credit card applications are processed relatively quickly, so apply for the card you really want, and if you are declined, you can always try again with a backup choice.

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