Prepaid Credit Cards
New products in the financial space, prepaid credit cards are increasingly becoming the new financial product of choice. They offer excellent benefits to cardholders and issuers alike, and it stands only to reason that more people will be using prepaid credit cards in the future.
Prepaid credit cards are also called secured credit cards because they are secured by the amount of deposit the new card user puts in their account. If the credit card user does not pay back their credit card debt, then the company is able to take the money that was put on deposit as payment, effectively protecting themselves against the risk that the borrower spends more than they can afford.
In general, opening a secured credit card is easier than opening any other type of credit card. Some credit card issuers demand that any credit card is backed 100% by deposit, while others may require only 25-50% of the credit line be backed at any one time. Usually offered to those with bad credit, or people who have no credit, the secured credit card is a great way to build up your credit score for future, unsecured borrowing.
Shopping for Prepaid Credit Cards
In general, there are a few things you should look for when seeking out a prepaid credit card:
Low securitization – A 50% secured card is better than a 100% secured card for the consumer since for every $1 they deposit into the account, they receive $2 in a credit line. Typically, a low securitization will allow for a better credit card, since you’ll get a higher total credit line and more flexibility in how you can spend your money.
No Annual Fee – As you can imagine, secured credit cards do not generate a lot of interest for the banks that issue them—there is no reason to ever pay interest on a secured card, since it is backed with your own deposits. Thus, banks need a good way to make money on the cards they issue, and will often charge an annual fee ranging from $0-35 per year. No annual fees are preferred, since you should never have to pay money just for the privilege of borrowing small amounts of money.
Interest Rates – Unlike other card types, there are two interest rates you should pay attention to with secured cards. First, as with any credit card, you’ll want to make a mental note of the annual percentage rate, or APR, which is assessed on your carried over debt. Secondly, note the rate that you receive on your secured card deposit. The money that you use to back your secured credit card is your own, and it should receive a rate of interest in line with current savings rates. During periods of higher yields, this amount will often be in line with money market accounts and funds, though it will still lag long term deposit interest rates. At 4%, for example, your $500 deposit amounts to $20 in positive interest each year, and you should make sure that you get every dime of it!
Convertibility – Secured credit cards are very often a great way to raise your borrowing profile. Many cards offer the opportunity to advance from a secured card to an unsecured card after several consequitive monthly payments. Others, however, will only let you convert to partially secured, in which case you’ll only have to prepay a fraction of the credit line. It would be advised that you try first for a partially secured card with convertibility and then work from there down to 100% secured cards with convertibility and then to simply 100% prepaid credit cards.
Not Prepaid Gift Cards
One important distinction that must be made is that prepaid credit cards are not the prepaid American Express, Visa, Discover, or MasterCard products that you see in the checkout aisles. No, a prepaid credit card will allow you to spend and pay back what you’ve spent, and will also charge interest on the swipes you make. They cannot be purchased over the counter, and they are not, in any way, intended for use as gift cards. Instead, they require a credit check, a full page application, and a process that is very much in line with any other credit card, secured or unsecured.