Secured Credit Card Vs. Unsecured Credit Card Vs. Debit Card Vs. Prepaid Credit Card
By Mory Brenner, Esq.
Q. What makes a secured credit card different from a regular credit card?
A. What people think of as a regular, or unsecured, credit card basically operates as an unsecured loan or line of credit. The bank decides how much money they would be willing to loan you on an unsecured basis and issues the loan in the form of a credit line based on your good credit. The credit card itself merely serves as the instrument used to conveniently access the bank’s credit line. With a secured credit card you establish a secured savings account as collateral for your line of credit. By offering the collateral of the savings account the bank gets the comfort to extend the credit line to people who might have bad credit or no credit at all.
Q. I see offers for unsecured credit cards even for people with bad credit, why wouldn’t those be better than a secured credit card?
A. You will indeed see offers for unsecured credit cards even with poor credit all the time, but you need to look at them very carefully. After in depth analysis you may conclude that most of those unsecured credit card offers for people with bad credit emerge as consumer unfriendly at best and outright fraud at worst.
Q. What should I look out for when I see offers of credit cards for people with bad credit?
A. Fees, rates and more fees. Most unsecured credit card offers for people with bad credit look like this: You get an unsecured credit card with a credit limit of $250. Well that sounds just great the rate might even be reasonable, I will now examine the first offer like this I randomly find online.
Example 1 – 9.9% APR Interest, not bad but look at these fees: $29 account set up fee, $95 program fee, $48 annual fee, $7 monthly servicing fee, and lets add an extra family member card for another $20 fee. Add those all up over the first year and you will find your $250 unsecured credit card cost you $276. While an unsecured card might sound better, in reality people with bad credit will only get unsecured credit cards if they come in the form of these consumer rip off unsecured credit cards.
Q. Do any unsecured credit cards for people with bad credit exist that do not fir this mold?
A. Sure, the ones that only allow you to buy things from their own overpriced catalogue.
Q. What if someone just has a few minor flaws on their credit report?
A. Certain card issuers may offer credit to people with slight credit problem, but in general legitimate unsecured credit cards do not exist as an option for people with very bad credit.
Q. So what does a person with bad credit do if they need a credit card?
A. Folks with poor credit or no credit need to look at the other options; secured credit cards, debit cards or prepaid credit cards.
Q. Ok then, what is the difference between secured credit cards, debit cards or prepaid credit cards?
A. Let’s start be comparing secured credit cards to debit cards and later we can discuss the difference between debit cards and prepaid credit cards.
Q. Please professor, can you proceed to compare secured credit cards to debit cards?
A. Secured credit cards exist in association with a savings account at a bank, debit cards carry the same relationship but most often with a checking account. While your credit limit reflects the balance of the connected account a secured credit card savings account most likely remains constant, your checking balance will vary greatly depending on what you deposit and withdraw by check. Therefore, people with debit cards must exhibit much greater care with keeping track of balances and credit limits.
Q. That does not sound too different, is the type of bank account the biggest difference between secured credit cards and debit cards.
A. No, for the biggest difference look at how they report credit. A secured credit card reports payment history to the credit reporting bureaus just as if it was a regular unsecured credit card and a debit card acts like an extension of your checking account reporting nothing.
Q. So if one of the goals of obtaining a secured credit card involves improving or establishing credit a debit card does nothing and a secured credit card stands out as the only real choice?
A. If you want to improve or establish credit you understand, you need a secured credit card and do not get fooled by other ads or products.
Q. How do these prepaid credit cards compare to secured credit cards and debit cards?
A. Prepaid credit cards operate sort of like reverse credit cards, you pay first and than use what you pay. Your credit limit ends up as whatever you prepaid but have not used yet. In terms of how prepaid credit cards operate, they look most like debit cards in that the available credit varies and they do not report payments to credit score agencies.
Q. Imagine someone with no need for credit improvement (not me, picture it like a dream), what makes a secured credit card, debit card or prepaid credit card stand out from one another?
A. Either of the credit cards act like an unsecured credit card for purchases, so things generally go smoother than a debit card where you have to enter an additional personal code and debit cards may not be used for all purchases, but these days it may be up to 99%.
Q. What if I need to rent cars and they require a credit card, but other than the need for a card to rent a car I do not want a credit card?
A. Avis and Budget both reported acceptance of debit cards in addition to secured credit cards and prepaid credit cards. When renting a car with either a debit card or prepaid credit card you need to keep an extra eye on your balance. With a credit card the car rental firms will want to make sure you have enough of a credit line to cover the rental. When using a debit card they will place a minimum of a $500 hold on your account while you rent their car.
Q. Why would a consumer with a debit card care about holds on their account if the rental car company does not take any money at the time of the hold?
A. Because it affects the available balance of the associated account. For a debit card that means if you only keep a $501 dollar balance and they put a $500 hold on the account, even though you may be renting a car for $20 per day for three days, you will only have $1 available and every check that hits during the period of the hold will bounce.
Q. Do the debit cards offer any advantages over the credit cards?
A. Debit cards most often allow access to your regular checking account, so you can use any money you have as a balance. For people making larger purchases that do not want to tie up money in a secured savings account or move money frequently in a prepaid account, the debit card can be more convenient. Since the debit account acts like an extension of the checking account, having a checking account with a debit card is really like only having one account when it comes to bank reconciliation and accounting, so some people find it easier to keep track of their money with only a single account, especially if they need help with budget problems. On the same note, a debit card requires no bills you need to pay because the money for purchases comes directly from the savings account.
Q. I hear different opinions on fraud protection, how does that compare for secured credit cards, debit cards and prepaid credit cards?
A. These days all three will protect you in the long run. Until it all gets straight becomes the issue. Most often a credit card just notes a purchase as fraud and you may not even see it on a statement. When fraud hits your debit card a perpetrator can drain your checking account and it might take up to 60 days or longer to get everything where it belongs. In the meantime you may not have access to your money and could be bouncing other checks like crazy.
Q. Are there any advantages for a prepaid credit card over a debit card or secured credit card?
A. Only that you do not expose your whole checking account to potential fraud. I especially dislike the prepaid credit cards compared to debit cards because most banks will allow you to have a debit card along with your bank account for free and most prepaid credit cards require monthly fees of $5-$10.
Q. Any final words of wisdom about secured credit cards, unsecured credit cards, debit cards and prepaid credit cards?
A. If you have bad credit and what to rebuild credit or if you have no credit and want to establish credit, secured credit cards stand alone as the best option. If you only have one open account reporting to the credit bureaus and want to open two different lines of credit, get two secured credit cards!
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