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Secured Credit Cards
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A secured
credit card is a type of credit card secured by a deposit
account owned by the cardholder. Typically, the
cardholder must deposit between 100% and 200% of the
total amount of credit desired.Thus if the cardholder
puts down $1000, he or she will be given credit in the
range of $500–$1000. In some cases, credit card
issuers will offer incentives even on their secured card
portfolios. In these cases, the deposit required may be
significantly less than the required credit limit, and
can be as low as 10% of the desired credit limit. This
deposit is held in a special savings account. Credit card
issuers offer this as they have noticed that
delinquencies were notably reduced when the customer
perceives he has something to lose if he doesn't repay
his balance.
The cardholder of a secured credit card is still expected
to make regular payments, as he or she would with a
regular credit card, but should he or she default on a
payment, the card issuer has the option of recovering the
cost of the purchases paid to the merchants out of the
deposit. The advantage of the secured card for an
individual with negative or no credit history is that
most companies report regularly to the major credit
bureaus. This allows for building of positive credit
history.
Although the deposit is in the hands of the credit card
issuer as security in the event of default by the
consumer, the deposit will not be debited simply for
missing one or two payments. Usually the deposit is only
used as an offset when the account is closed, either at
the request of the customer or due to severe delinquency
(150 to 180 days). This means that an account which is
less than 150 days delinquent will continue to accrue
interest and fees, and could result in a balance which is
much higher than the actual credit limit on the card. In
these cases the total debt may far exceed the original
deposit and the cardholder not only forfeits their
deposit but is left with an additional debt.
Most of these conditions are usually described in a cardholder
agreement which the cardholder signs when their
account is opened.
Secured credit cards are an option to
allow a person with a poor credit history or no credit
history to have a credit card which might not otherwise
be available. They are often offered as a means of
rebuilding one's credit. Secured credit cards are
available with both Visa and MasterCard logos on them.
Fees and service charges for secured credit cards often
exceed those charged for ordinary non-secured credit
cards, however, for people in certain situations, (for
example, after charging off on other credit cards, or
people with a long history of delinquency on various
forms of debt), secured cards can often be less expensive
in total cost than unsecured credit cards, even including
the security deposit.
Prepaid Credit Cards
A prepaid credit
card is not really a credit card, as no credit
is offered by the card issuer: the card-holder spends
money which has been "stored" via a prior
deposit by the card-holder or someone else, such as a
parent or employer. However, it carries a credit-card
brand (Visa or MasterCard) and can be used in similar
ways. As more consumers require a suitable solution to
rebuilding credit, recent changes have allowed some
credit card companies to offer pre-paid credit cards to
help rebuild credit. They are hard to find and have
higher APR fees and higher interest costs.
After purchasing the card, the cardholder
loads it with any amount of money and then uses the card
to spend the money. Prepaid cards can be issued to minors
since there is no credit line involved. The main
advantage over secured credit cards is that you are not
required to come up with $500 or more to open an account.
Also most secured credit cards still charge you interest
even though you are not actually "borrowing"
any money. With prepaid credit cards you are not charged
any interest but you are often charged monthly fees after
an arbitrary time period. Many other fees also usually
apply to a prepaid card.
Prepaid credit cards are often marketed
to teenagers for shopping online without having their
parents complete the transaction.
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