A young lady I know would like to make online purchases, but doesn’t have a traditional credit card or bank account yet. Someone else might have poor credit and be unable to qualify for a regular Visa or MasterCard. Or a student you know may want to have a way to pay for books and necessities while in college.
“No Credit” Credit Cards To The Rescue?
For people in these situations — those who have no credit or are still working to build their credit history — certain types of credit cards may help. A lot of people start off with a prepaid or secured credit card which can be used in place of traditional credit cards, whether it be at stores around town, online purchases, or for monthly bills.
So what do these types of cards offer? You can consider them to be credit card “training wheels” so to speak.
Secured Credit Cards To Build Credit
Secured credit cards are cards that extend you a line of credit based on some amount you deposit with the card issuer. These cards will often have a set limit that may be increased by additional deposits or by maintaining a good payment history. These cards are a great way to build credit for those who have no credit (or have bad credit). Some popular examples:
When you need to (re)build a good credit history, you’ll need a secured credit card that’s reported to the credit bureaus. Check with the creditor, because not all (although most) companies report their accounts to the credit agencies. If your credit standing is good, some banks might be willing to convert a secured credit card into an unsecured account. Ask your creditor if that’s an option for your secured card.
To stay on the safe side, the FTC warns those looking for secured credit cards to watch out for scams. In particular, avoid offers that involve calls to 900 numbers and promises to fix your credit, which can be exorbitantly expensive. You can repair bad credit on your own by establishing good credit management skills and by managing your debt responsibly.
A Look At Prepaid Credit Cards
Prepaid cards function somewhat like debit cards: hence they’re given the name “prepaid credit” or “prepaid debit” cards. They work by having the cardholder deposit some funds into an account — funds which can then be drawn against when the card is used. Here are some popular examples:
Note that ordinary debit cards are typically linked to your bank account and aren’t intended to help you build credit. On the other hand, prepaid cards are reloadable cards with their own accounts and may, in some cases, be used to help you establish credit. They can be a way for teens, students, and other spenders to learn money management skills without having to juggle cash (or lose it, as is often the case for me). You’re limited to spending only up to the amount you put into your prepaid card account.
Prepaid credit cards are also available through many retailers now — you can buy them in certain denominations and use them like gift cards or prepaid phone cards. Supposedly, prepaid cards have become popular in part because consumers want to avoid overdraft fees on their checking accounts, which can be as high as $35 each instance.
Before signing up, check on the fees incurred by using such cards, such as an activation fee you may need to pay.
Be Aware of Credit Card Fees & Charges
Although these cards can be a convenience, you should watch out for fees and charges before signing up. These fees can range from monthly to annual fees, ATM fees, or even fees for making purchases. Another charge you might run into is an application or activation fee.
I would carefully read the terms and conditions for any card I’m interested in, prior to handing over an application. Given that these cards are usually intended for those with less experience with credit or are just starting afresh as cardholders, new customers should make sure that they can handle the payments and interest rates for these cards. Note that APRs can change for a variety of conditions, such as a late payment or failure to pay.
If the fees for your prepaid cards or secured credit cards are too much to handle on a monthly basis, it might be worth the time to investigate alternatives like a debit card that’s linked to a high yield checking account or high interest savings account with a bank or credit union.
Whichever card you select, make sure you use it as an effective financial tool that can help you (and not hinder you).
{ 14 comments… read them below or add one }
I agree that these are a good option for someone just starting to build a credit record. I didn’t know there were so many. Good stuff.
“Note that ordinary debit cards are typically linked to your bank account and aren’t intended to help you build credit. On the other hand, prepaid cards are reloadable cards with their own accounts and may, in some cases, be used to help you establish credit.”
Help me get my mind around this. What, exactly, would get reported to the credit bureau? If you buy one of these at Wal-Mart, for example, the issuer wouldn’t even know who you are, correct? I could pay cash at Wal-Mart, go next door to Barnes and Noble, use the card to pay for my purchase, and walk out the door – completely off the grid.
Even if the issuer does have my indentifying information, what is there to report? There’s really no concept of a bill that is “due”, since it’s a pay up-front concept.
You’re not the first person to say that these cards can help build credit, so I’m wondering if I’m missing a key fact.
Prepaid cards may allow those unable to get credit cards to purchases online, and to teach your kids how to use and repay regular credit cards with accruing debt, but they don’t help your credit any.
Secured cards appear to help credit but require a deposit to compensate the risk of your credit line.
-Dan Malone-
There are some prepaid cards that may also offer a “credit builder” feature. Take for instance the “Account Now” prepaid cards. Their application page also references a “free credit builder” feature and the possibility of applying for and receiving a line of credit. Here is some info I picked up from the “Account Now” site:
Hey SVB,
Actually, I was considering signing up for a credit card – after not having had one in years – just to improve my credit. Any ideas which one might the best? I’m not planning on using it, but just want to have it open.
Ah.
PRBC is a bit different than the other credit bureaus. I was thinking that the prepaid card activity was somehow being sent to the 3 main bureaus, and I was struggling with that concept.
The line of credit is just a loan, of course, so it makes sense that this activity would be reported to all bureaus.
@James,
With good credit, you can apply for any type of card. I would go for a rewards card in your case since — just in case you decide to use it — you can get rewards (cash back or redeemable points). I actually prefer cash back rewards cards! I wrote about this a bit in this article: although lots of people have suggested Schwab’s 2% cash back credit card too. I personally also like Chase (probably the Freedom card or Sapphire) or Amex Blue.
@Kosmo,
I guess with prepaid cards you are given a “test” of what happens with using a card. I look upon them as a transitional step to moving to regular credit cards. Interesting that there are credit bureaus beyond just the three main ones.
If I were looking at prepaid cards verses secured credit cards I would ask what I hope to accomplish.
If the goal was to help build my credit score back, then a secured card is the way to go.
If the goal is simply to satisfy my need to have a card to make card purchases (online or other) or to teach myself about the concept of card use, a prepaid card is the way to go.
You do have to watch fees with prepaid cards, but that is going to change soon as regulation comes into the industry. However, if you buy from a reputable source, usually the only fee is the initial load fee of a few dollars – mainly covering the cost of the plastic. There may be an inactivity fee after a year but most people should use the cards by then.
Prepaid Visa cards are great for online shopping safety as well. Obviously, I would say that the general concensus is now that it’s safe to use your cards on well known sites, like Amazone etc. But for those of us, like myself, who hate the idea of using a card associated with a bank account on any smaller, lesser known site, these are a good backup plan. In the UK, the mobile phone provider, O2, has one and I know that Paypal has one too. If you can just apply the amount you are going to spend, you have less to worry about in terms of security online.
I know so many people who have had bank account problems relating to online fraud, that I will personally onlyuse a card associated with my bank account on few shopping sites – and always the bigger, well known ones.
I’ve seen so many pre-paid credit cards recently. At first I was wary because they only seemed to be offered by unknown companies, but now larger, well-known companies have started offering them so I’ve been wondering if they are a good idea.
One of the best prepaid cards I have seen is the new Mango card with no fees if you load $500 a month. With the coming changes in credit card law that will limit students who do not have a job, and with parents having to co-signature these cards, these types of cards are sure to become very popular with parents and students alike. They are also great for online shopping and work anywhere MasterCard is accepted.
I’m interested to see the difference in prepaid credit cards between the UK credit card system and our US based credit system. Are we just the worse country when it comes to managing credit?
I have applied and have received a prepaid card, but have not activated it yet. Will I be charged any fees before activation? I do understand there’s an activation fee, and and possible a fee to use the card? But I do not want to be charged anything before even activating it. Just wanted to make sure.
Also, my credit is not so great, and I am looking for a credit card that I may be approved for? Do you happen to know if any that may be out there? I do appreciate it! Thank you in advance
Mike
@Michael,
The terms and fee policies for prepaid cards vary per issuer. So I am not sure if they will charge you for activation. Perhaps you can give them a call to confirm? Also, if you are interested in more choices for these types of cards, I would like to direct you to our new credit card section where you can shop for cards that are for people with no credit or bad credit.
Here are the links:
Hope this helps!