In this day and age, access to a credit card is virtually a necessity. It’s very impractical to carry bundles of cash and paying for things is so much more convenient with plastic. But using your debit card also carries a little added risk. Lately, the credit industry has been stifled and getting a credit card has become more difficult. Our recent credit crunch is affecting consumers ability to get credit and the bank’s ability to extend credit. Even if you have a great score, it can be a lot harder to obtain credit today than it was just 3 years ago. In my recent experience, trying to get a large limit increase was nearly impossible and many card companies were slashing limits. So, what if you have a really bad credit history and need a card? Here are some tips on how to get by.
Prepaid Secure Credit Cards
A possible solution to your credit card dilemma is a prepaid debit card (i.e. secured credit cards). A secured card is a newer product that is gaining quick popularity. Prepaid cards have been around since the 80’s, but have seen a huge boom in usage recently as traditional credit cards are harder to come by. These cards are perfect to pay for purchases like groceries, household bills, or utility bills. They basically work like a debit card that would be tied to your bank account except it’s instead only tied to the money you deposit to secure the card. You deposit funds into your card’s account and charge away up to the limit of money you’ve deposited. No one is lending you the money or charging interest, so you can only be charged what is in your account and if your card is lost or stolen your entire checking account isn’t at risk. Prepaid cards can also be used at an ATM to withdraw money. The major advantage of a prepaid debit card (or secured credit card) over a standard bank-issued card is that transactions are reported to all 3 credit agencies. So, if you are being affected by poor credit or don’t have a credit history established yet a secured card will help you establish and improve your credit score over time. When used responsibly these cards can be the added boost you need to obtain an unsecured card or other type of loan in the future.
Another bonus to secured cards, is that they are extremely easy to obtain. There is very little risk to the bank, so they have about a 95% approval rate with most cards. No credit is involved at all so as far as the bank is concerned, if you are willing to deposit money to back the card they will let you use it. Secured cards are similar to debit cards, but have more advantages like improved fraud protection which is very important if you do a lot of online transactions. Bank-issued debit cards don’t have the same consumer protections that secured cards do. You will usually get credited if fraud takes place, but it may take much longer and in the meantime you could be dealing with an empty bank account. Another way secured cards have an advantage over debit cards is that they may be accepted where debit cards would not. If you want to put down plastic for airline and hotel reservations or car rentals, a traditional debit card may not be accepted, or at the very least, may not be the ideal way to pay.
There are plenty of good things about prepaid debit cards, but this new product is still having some growing pains. The prepaid card industry as of now is mostly unregulated, so there are a few more things to watch out for. Less government oversight means unscrupulous companies may try to squeeze every last red cent out of consumers with hidden fees. Some prepaid cards can be very reasonable, but others will be overwhelming with fees and poor service. Recently, there have been increased regulations on standard credit cards, but prepaid debit cards haven’t quite hit the radar of lawmakers. Depending on which card you choose there can be various activation fees, transaction fees, inactivity fees, monthly fees, and yearly fees. It is important to read all that fine print before you activate it and deposit your hard-earned cash. There is a tremendous variability between the customer service and the fees in each and every card so it pays to shop around.
One reason that I really like the idea of a prepaid card is that it can help keep vulnerable people out of trouble. These cards are great for people that have struggled with debt in the past since it puts a mandatory limit on how much can be spent while still feeling like a credit card. There’s no interest and no snowballing balance. Unpaid credit card debt can lead to awful things like wage garnishment, liens on homes, and even bankruptcy. Most of us want credit cards for the convenience factor, but unsecured cards just cause trouble for certain people who can’t control their spending or only make the minimum credit card payment each month. If we don’t have to borrow money every month, why do we get stuck in the cycle of doing it? We need to be protected from fraud and have customer service, but increasing debt and high interest rates are best avoided.
What to Look for When Applying for a Secured Card
The main thing you need to watch out are high or unnecessary fees. Some companies can charge up to $50 for a first time activation while others charge absolutely nothing. There might be veiled charges like customer service fees, balance check fees, etc. Things that you think should be free, AREN’T! These minor charges can make your balance dwindle., but if you know what triggers them they can be avoided. The terms and conditions for these cards can vary significantly, so learn about their fee structure before you deposit your cash. Also, make sure that their customer service is up to your satisfaction. If you ever have a problem like fraud, phone support can be very important. Prepaid cards aren’t perfect, but i think the right card can be a good thing for a many Americans. If you are mindful of the fees, these cards are just as helpful as traditional credit cards.
About the author: This column was written by Garrett Driscoll from Debt Eagle. Come visit if you need information on with credit card debts, how to settle debt, or bankruptcy.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.