Bankruptcy filers and consumers with bad credit that are looking for options to rebuild their credit scores will usually need to start out with a secured card or a prepaid card. If you are finding that you are not being approved for unsecured credit cards you will probably need to try a secured card in order to build your credit for a while. I waited over a year after my bankruptcy to even try to get a credit card but there are times when people with bad credit need a credit card right away and can’t wait until they are approved for an unsecured card. It is important when rebuilding that you know the difference.
Secured cards are beneficial not just for those with bad credit but for anyone with no credit who needs to establish a credit history. Secured credit cards require a cash deposit or “security deposit” that is held as collateral. The minimum required varies by the credit card but is typically around $200 or $300. Most of the time, your deposit it the amount that is your credit limit. For instance if your deposit is $200 you will have a $200 credit limit on your card. Oftentimes secured cards allow you to deposit amounts of as much as $5,000.
You would use your secured credit card just as you would any card and you make monthly payments on your balance or pay it off. The deposit is simply held in the event that you default and then it is used to pay the balance on the card. Any amount not used is usually refunded whether you pay off the card or cancel it. Payments are generally reported to the credit bureaus as well, thus helping you build or rebuild your credit.
Prepaid cards are similar to secured cards, as they are available to those with bad or no credit histories, but are not as beneficial in rebuilding credit. Prepaid cards usually do not report to credit bureaus, so you’re essentially just paying for a card to use when needed for purchases, but it won’t help out your credit much. There are some prepaid cards that do report so you may want to ask first if it is a goal you have in mind.
The difference between a prepaid and secured card, is that when you use a prepaid card, you are actually using the money you have loaded onto it. It’s very similar to a debit card in that manner. Once the amount runs out, then you reload the card. You will not receive a monthly statement as with unsecured cards.
You may think that because of bad credit or a bankruptcy that you don’t have a choice and have to take the first card that you are approved for. It is essential when shopping for either a secured credit card or prepaid card that you are aware of the fees that are involved. Both may have a number of fees from activation fees to monthly fees. Make sure you shop around and choose the one that is the best for you and what you would like to accomplish.