Blog

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.

Five essential questions to ask before choosing a prepaid debit card

By Shane Tripcony

No, this is not a test, and there definitely won’t be a grade handed out. Actually, scratch that completely. In the quickly expanding universe of prepaid debit cards the choices are multiplying faster than rabbits. Knowing which card is best for your individual circumstances requires a little self-examination. And the only way to do that is by answering the right questions. You know, a test.

But here’s the big difference between the questions below and the ones that stared you in the face in the classroom. Unlike what teachers told you, there really are no right or wrong answers, just ones that apply to your situation. And the grade you get won’t be an A, B or C; instead, it will be choosing the right card among so many options. Fully answering these questions will help.

How often will I use the card?

This is more of a concern than many people realize.

While it’s true that monthly fees for maintaining an account and transaction fees for using it are standard for many prepaid cards, some are more extreme than others. Obviously, searching out the cards with the lowest monthly fee is important. But anyone who is planning on using the card for routine purchases should pay extra close attention to the charges levied on individual purchases. Fortunately, cards that tout their lack of fees are getting easier to find, especially if you search through the reviews at BestPrepaidDebitCards.com.

The fees that apply if you plan to use your card frequently go beyond the obvious ones. For prepaid debit cards, the most obvious one to look out for are reload fees, which is what card issuers charge when you add money to your account (discussed further below). The more you use your card, the more frequently you are likely to reload it, putting you at greater risk of these fees.

Also, the more you use the card, the more likely you are to need to check your balance. And yes, sometimes there’s a fee for that, too. Linda Sherry, director of national priorities at Consumer Action, a non-profit advocacy and educational organization dedicated to advancing the interests of consumers, has some advice for the curious. “Steer clear of balance inquiry fees by checking your balance with a call to customer service, when free, or by checking your account online or scheduling email or text alerts,” she says. But her caveat, “when free,” is a reminder that you have to know your card’s rules – sometimes there’s a fee for calling the card issuer to obtain your balance.

There’s one more thing to mention. Besides fees for various kinds of activity, some cards charge fees for inactivity. So sitting on your card may do more harm than good.

How do I plan to load funds onto the card?

When you buy a vehicle, you know it will need refueling on a regular basis. That’s why you ask about how many miles per gallon it gets. Your fuel bills will help determine how much of a deal you’re really getting on your new ride.

Reloading money onto a prepaid debit card is like refueling an automobile. It’s unavoidable and you will have to do it repeatedly, which makes it a potentially big expense. So you should do it as cheaply as possible. As a cardholder, you need to be keenly aware of both how you plan on adding money to your account – either by direct deposit or bank transfer or some other method – as well as what fees are charged for each.

Once you decide how you will reload, look for the card with the best deal on that method. A card’s website will explain the various ways of reloading, and should show in detail what each will cost. If a card never charges for your particular method (or methods) of reloading, that’s obviously ideal. In some cases, it comes down to how often you plan to top off your card. For instance, if you plan to reload only twice a month, and the card doesn’t charge you until the third reload, you’re OK. The point is to keep the fees to a minimum.

Sherry says reload fees are the main ones that customers should try to avoid. “Reloading fees can often be avoided by using direct deposit or funds transferred from a bank account,” she says. That’s true for customers who have bank accounts and want to use them in connection with their prepaid cards. People who don’t will have to look at other options, including reloading less often.

Will I frequently use the card to get cash from an ATM? 

ATMs are part of our everyday lives. Most people with bank accounts use them, and getting charged a fee for using one is common, especially if it’s not one of your bank’s ATMs.

This is one realm where prepaid debit cards don’t differ much from traditional bank accounts. Some cards hit you hard on ATM use, while others are gentler. When you’re shopping around for a card, look for one that makes the ATM experience a little less painful. Another way to avoid ATM fees, Sherry says, is getting cash back at a retailer when you use your card.

Is this card for me or for a family member?

How you plan to use a prepaid debit card is a critical factor in determining which one you choose. But what if you are not the person who will use the card? In that case, you very likely could end up with a card that you wouldn’t actually choose for yourself.

There are numerous reasons why you might want to get a card for a family member. It could be an outright gift. Or it could be your way of giving a young relative some experience in budgeting. But whatever the reason, you should remember that a prepaid card is a financial tool. And when you give a new tool to a novice, it should be low-maintenance.

In other words, it should be a card with a simple fee structure. A newcomer should get one that he or she can understand thoroughly. The card’s limitations and the kinds of problems a person can run into with it should be clear.

The simplest deal is not always the best deal, of course. The prepaid debit card you choose for yourself may have a fairly complex set of fees, but one that you can use for maximum savings by adjusting your spending habits.

But the fact that you are reading this article indicates you take financial issues seriously. The relative who gets handed a card may not be so focused (and may not even use the card when its initial value is gone). If the relative makes some mistakes, and winds up getting less value out of the card than was possible, it will be a lesson learned. And the more obvious the lesson, the more impact it will have.

Could I do better?

If you already have a prepaid debit card, you may be satisfied with it. You know how to use it effectively and minimize the fee, and you no doubt came across some cards that are much worse. But don’t get into a rut. With the increasing popularity of prepaid debit cards, and the rise in competition, there may be one available now that is far superior to the one already in your pocket.

And you also may be better at managing a prepaid card yourself. If you’ve handled your card wisely and learned its potential, you could be better equipped to evaluate the many new ones on the market. Is the time right for an upgrade? It’s a question worth pondering.