If you have bad credit, finding a credit card can be tough. But not having one can be inconvenient, especially if you travel or shop online. That’s where cards for bad credit come in. They are easier to get than traditional cards, and may provide some of the benefits. The cards in this category fall into two camps: prepaid cards (which are actually debit cards) and secured cards.
Which one is better? It depends, in part, on what you want to get out of it. Here are pros and cons of each.
Keep Spending in Check
Both types of cards can help you avoid the temptation of spending money you don’t have. With a prepaid card, you spend the money you “load” onto the card. With a secured card, you place funds in an account with the issuer, and that money is held as a security deposit. Your credit line is usually equal to your deposit, though it is possible that if you use it responsibly, your card issuer will raise your credit limit. But you’re not likely to get a credit line that’s significantly larger than your deposit, so overspending significantly shouldn’t be a risk.
Verdict: Either can work
Quick Access to Cash
Need cash fast? There can be a significant difference in how quickly you can get your money out of one of these accounts. Prepaid cards make it easy to withdraw the cash you’ve loaded at an ATM if needed (watch out, though — there may be a fee) or make a purchase at a store and request cash back. With the secured card, though, you often tie up your deposit until you close the account. If you are short on cash one month, you can’t just say to the issuer, “take my payment out of my deposit.” (Some issuers do allow you to draw down from your savings account balance and lower your credit limit, but that request may take a week or more to process.) You can get a cash advance on your secured card, but the interest rate for cash advances is often high, and there may be an ATM fee as well.
Verdict: Prepaid card
Building or Rebuilding Credit
If your goal is to establish a positive credit reference on your credit reports to build or rebuild credit, secured cards win hands-down. Most secured card issuers report account information to the major credit reporting agencies, while prepaid cards don’t. You can benefit from the credit reference a secured card provides, as long as you pay on time and keep your balances low.
Keeping balances low is key: With a secured card your credit limit is probably fairly small, and it helps to keep balances on credit cards at less than 10% to 20% of your available credit. With a $300 limit, that means you want your balances at about $60 or less! So you’ll either want to pay off purchases quickly (before the statement closing date when most issuers report to the credit bureaus) or use your card sparingly. You can find out how your debt usage ratio affects your credit scores with a free credit report snapshot from Credit.com.
Verdict: Secured card
Both prepaid and secured cards can present challenges when you travel. If you use any kind of plastic to rent a car or get a hotel room, there will be a hold placed on your account that can tie up funds you may need. Make sure you understand the merchant’s hold policy and consider carrying a backup card. You can use one to reserve the hotel room, for example, and the other to pay for it.
Verdict: A wash
Any card that carries the Visa, MasterCard or American Express logo will be covered by that brand’s liability policies, which usually offer zero liability for fraudulent purchases when the card is used without a PIN and you report the loss or theft of your card right away. But as far as federal protections go, credit cards are covered under the Truth In Lending Act which caps liability at $50. Prepaid cards are not covered by that law, and according to Consumer Action, liability for fraudulent purchases generally matches that of debit cards, meaning it starts at $50 and can go up from there, but that is voluntary.
Another benefit of secured cards is the fact that you can dispute a purchase and withhold payment until the card issuer investigates. This is your right under the federal Fair Credit Billing Act, protection that does not extend to prepaid cards. That means a secured card may be safer for online shopping, where you pay for something before you get a chance to see the merchandise you’ve purchased.
Verdict: Secured card
Whichever type of plastic you decide to use, pay attention to balances and review your statements for suspicious charges. Set up online or text message alerts to help you keep track of activity. And review the cards you carry annually to make sure they still meet your needs.
More on Credit Cards:
- The Credit.com Credit Card Learning Center
- How Secured Cards Can Help Build Credit
- How to Get a Credit Card With Bad Credit