A secured credit card can be a starter kit for your financial life

By Nancy Munro

It’s hard to imagine these days, but Michael Jordan wasn’t always a great basketball player. After all, the future Hall of Famer didn’t even make his high school squad one year. Which is all to say that everyone, not just Michael Jordan, progresses in life from a mere novice to (we hope) some level of expertise and skill. All it takes is steady practice and determination.

The same could be said of our financial lives. Sometimes, we need to prove ourselves with one financial product before graduating to another that offers both more perks but also requires more responsibility – sort of like starting on the junior varsity team before making the jump to the varsity. That’s all a pretty apt way of describing the difference between so-called secured credit cards and the unsecured variety that most people are familiar with. As you’ll soon see, starting your financial life with a secured credit card can be just like getting a chance to play on the JV team while the varsity coach watches.

First off, how is a secured card different from a so-called regular credit card? Typical credit cards allow holders to essentially borrow money, up to a set credit limit. The money borrowed can be paid back each month or, more likely, over the course of many months or even years, all the while earning the card issuer a tidy amount of interest. A secured credit card functions quite differently. Issued by a bank or other financial institution, a secured card requires that a certain amount of money be placed in the account before the card is activated and used. The money placed in the account is exactly the amount available for use – there’s no credit limit over and above what you put in initially.

The reason secured credit cards function like this is pretty simple. There are plenty of people who have either no credit history or whose past use of credit cards has been shoddy enough that banks don’t want to give them another one. In other words, there are lots of people banks don’t want to lend money because there’s too high of a risk that they won’t get paid back. But that risk is eliminated with secured cards because users can only spend the money they fund the card with upfront.

Because of that low-risk structure (at least for the banks), secured credit cards are relatively easy to get. But unlike unsecured cards, which do not require a deposit to use, secured cards have a wide range of fees, charges for everything from applications to insurance. Take some time to comb through BestPrepaidCards.com to see which cards have the best and worst fees.

But here’s the good thing about a secured credit card. For those with either little or a checkered credit history, a secured credit card is a tool to prove that you can be trusted with the sort of credit limit a regular card offers. But you actually do have to prove that you can make timely payments on your secured credit card account.

But if you do that, will the coach – or, in this case, the three major credit bureaus who monitor repayments and hand out the all important credit scores that banks use to determine whether someone is a safe bet to offer a credit card – actually be watching? We checked with the three major credit bureaus, TransUnion, Experian and Equifax, and only Equifax responded to say that payments made on a secured credit card are treated the same way as those made on an unsecured card. But given the relative uniformity of the three bureaus’ policies, it’s likely that Experian and TransUnion also look kindly on responsible use of a secured credit card.

To improve or build a credit history with a secured card, here are some things you can do:

• Not all secured cards are equal. Shop around for the best (ie. lowest) fees possible.
• If possible, try to get a card from an issuer that also offers unsecured cards. With a good payment history, it’s likely they’ll eventually offer you an unsecured card. According to Bankrate.com, it will take diligent users of a secured card about a year before they’re offered an unsecured card.
• Once you get the card, use it a few times a month and pay the balance in full. In other words, prove that you know how to handle plastic.
• The secured card is not the finish line. The annual fees and other costs with a secured card mean you are spending your money to spend your own money. Use the card only until a better (unsecured) offer comes along.
• Don’t expect the same perks with secured cards as unsecured cards. Airline miles and other gifts and offers are not the norm when it comes to secured credit cards.

Contrary to popular belief, prepaid debit cards are for everyone

By Shane Tripcony

Sometimes it takes a deep dive into the world of facts to dislodge a stubborn misperception. That’s exactly what happened in 2012 when a study by the Pew Charitable Trusts reached the startling conclusion that some people fare better using prepaid debit cards than checking accounts. Pew’s finding was enough of a bombshell that it spawned a surge in media coverage of the prepaid debit card boom.

To be clear, the Pew report was not a love letter to the prepaid debit card industry. It sharply criticized the industry for lack of transparency, and it pointed out the pitfalls (especially a profusion of fees) that an unwary customer can encounter. It called for greater federal regulation of prepaid debit card issuers. But the buzz created by the report finally helped dispel the old stereotype of the average card user. It’s now an accepted fact that prepaid debit cards attract many mainstream consumers.

Prepaid cards were long considered financial instruments of last resort. People who used them had the reputation of being “underbanked,” with checkered financial histories that made them unable to qualify for bank accounts or credit cards. While that may have been true in the past, three developments have changed this profile.

First, many ordinary consumers have become aware of what’s good about prepaid debit cards. Second, some consumers have learned how to pick the right card and use it wisely. Third, greater competition and advertising in the prepaid debit card industry have lured more customers who simply want something new.

Frustration with the old ways

Looking at recent history, it’s not hard to see trends that may have nudged people toward alternative financial products. Since the Great Recession, public faith in banks has declined. Consumers know that while bank accounts and credit lines offer numerous perks, their overdraft fees, overly generous credit limits and interest rates can push a person into a deeper hole during hard times.

And Americans’ fears about the erosion of their privacy have been growing right along with revelations of government monitoring and corporate mishandling of consumer information. It’s not just a question of email and phone records being collected and stored somewhere beyond their control. People want to know who has their financial information and what is being done with it.

For consumers with such concerns — and their ranks are increasing — prepaid debit cards have a natural appeal. These cards are designed to provide a certain amount of autonomy to the user, for better or worse.

Making purchases with a card that’s not directly tied to a bank leaves the consumer in control of his or her own finances. No third party will step in with either punishment or assistance if the card runs out of money. Susan Weinstock, the chief researcher in the Pew study, cites feedback the organization received in its consumer forum from prepaid cardholders. “They liked the control,” she says. “They liked that you couldn’t overspend.”

While noting the fees that people have to consider when choosing a prepaid debit card, the Pew research also found that many prepaid customers seek out the cards in an effort to avoid hidden bank fees.

Weinstock’s description of people who want to be in financial control is the opposite of the old image of a prepaid debit card user – someone who is out of options and at the mercy of the marketplace. Today, getting a prepaid card is often a calculated decision, not an inescapable fate.

Nobody looking over your shoulder

As for the issue of privacy, Weinstock notes that many consumers find some measure of it in prepaid debit cards. “Perceived anonymity” is a major attraction of these cards, she says. A prepaid card is backed by cash, not by a bank or credit account that has the person’s information on file. Many people who use prepaid cards therefore feel less exposed.

Creating a “scientific” profile of the typical prepaid debit card user is difficult. The very privacy of these cards makes it hard to compile statistics. Even the Pew study did not offer sweeping pronouncements on this issue. It did, however, find that consumers fall into various categories. Some pick their cards carefully and use them to maximum advantage. But others are less careful in their choices and get less benefit, and some make poor choices and do poorly. Of course, broadly speaking, the same levels of success could be found among users of credit cards or checkbooks.

The future and you

What does all this mean for the consumer who hasn’t tried prepaid debit cards? First, if the only thing that’s holding you back is the notion that prepaid cards are some sort of financial black mark, then your thinking is out of date. Plenty of mainstream financial consumers are using them. But on the other hand, the worst reason to do anything is simply because other people are doing it. Consider what prepaid cards have to offer and make up your own mind.

The sheer volume of prepaid debit cards on offer is great, so you need to compare deals carefully. For her part, Pew’s Weinstock has this tip: Don’t get a prepaid debit card with overdraft protection. Weinstock says that one hallmark of successful card users is the embrace of the automatic financial discipline that comes when there is no overdraft protection. It’s just the sort of advice you would expect for a mainstream financial product.