Credit, Secured Or Prepaid Cards? Choose Wisely
Many Americans prefer the convenience of swiping a card over paying with cash, and when it comes to this payment method, consumers have several options from which to choose. Traditional credit cards, secured and prepaid cards are often the top contenders when it comes to payment types that are not directly tied to your bank account.
However, the type of method you choose will have an impact on your credit reports and scores. For this reason, it’s important that you know how each card functions in order to choose a type that best falls in line with your goals.
Traditional Credit Cards
When you think of “credit cards,” a traditional credit product is likely the type you are thinking of. Credit cards are becoming the most popular card payment type, and a recent Javelin Strategy and Research study shows credit cards comprised 29 percent of point-of-sale purchases in 2011. This number is expected to grow to 33 percent by 2017.
Credit cards extend a certain amount of available credit – for instance, $1,000 – and you are allowed to spend up to that limit. You must make monthly payments to your credit card issuer and you will pay an interest rate on the remaining balance. Credit cards may also impose fees, such as annual costs or application fees.
Lenders will examine your credit history to determine if you are eligible for a credit card and your rates and terms will depend largely on your credit profile. Those with good credit scores will be in line for the best cards with low rates, while those with poor ratings may receive the highest rates.
A traditional credit card will appear on your credit report and your payment history and debt management will be reflected in your score. A credit card can be an effective way for you to build or maintain your credit rating.
Secured Credit Cards
A secured credit card is similar to a traditional credit card in many ways. You are extended a line of credit, and must make monthly payments on your balance. In addition, you will pay interest on your balance and incur possible fees. The difference between traditional lines of credit and a secured card: you must put down a security deposit.
Secured cards are typically reserved for those individuals with no established credit history or poor credit. Because you may pose a credit risk to lenders, they shield themselves from significant liability by requiring you to put down a security deposit, typically for the amount of the credit line. When you demonstrate that you are a responsible credit holder or you graduate to a traditional credit card, you will receive your security deposit back.
These cards can be a good option for those who are trying to rebuild their credit scores. While the rates may be slightly higher than those of traditional cards, credit lines may be lower which can help keep you out debt. Keep in mind that most, but not all, lenders report your payment history to the three national credit bureaus. For this reason, make sure you choose a lender that reports your payment activity, otherwise all your hard work will not impact your score.
Prepaid products can be a good option for individuals who are trying to avoid debt altogether or stick to a firm budget. Unlike secured or traditional cards, you must pre-fund these cards in order to use them. Each time you make a transaction, that amount is debited from the balance you put on the product. Once the money runs out, you must put more funds on to them in order to continue spending.
It’s important to understand that prepaid cards do not extend lines of credit, and as a result do not impose interest rates or have monthly payments. Because these are not credit lines, any individual can obtain a prepaid card and your credit history will not be a factor, according to MSN Money. In addition, a prepaid card is not listed on your credit report and will not affect your credit history in any way.