Secured or Pre-Paid Credit Cards
So you need a credit card for emergencies, peace of mind, or for your teenage child but aren’t willing to go into debt for it? The answer might just be a secured or prepaid credit card.
Secured Credit Card
You may want a credit card for all the usual reasons, but perhaps have got into difficulties in the past with credit. You may have a poor credit history and wish to build it back up, without the danger you could trap yourself deeper in debt. A secured credit card may be the answer for you in this instance.
What is it?
A secured credit card is one that requires a cash collateral deposit which becomes the credit for the account. So, if you deposit £500 on your card, you can make up to £500 of purchases. Some lenders will reward responsible use with a top up to your credit line without requesting additional deposits, so your limit ends up being slightly higher than the deposit. It is an ideal way to help re-build your credit history after a major life event, say a divorce, serious illness or job loss. Sometimes it is the only way for those who are finding it difficult to obtain credit. It is also a good way for those with no credit history at all to begin to establish some credit.
How much can I get?
The amount you are able to deposit will vary from card to card, so check out a few to see which will suit you. It also pays to shop around when it comes to fees for this type of card, as they will vary wildly and you don’t want your deposit eaten up by fees before you’ve even used it!
Although the trend with lenders today is away from secured credit cards and towards unsecured credit cards, they are still out there and still very useful for some people. Bear in mind though that some lenders will only lend to those with no credit, rather than those who have poor credit.
Prepaid credit card
This is actually something of a misnomer, as a prepaid credit card is NOT a credit card at all, but a ‘top up’ card and as such, will not be useful in establishing or rebuilding your credit history.
A prepaid card can be ‘bought’ for around £10 and will usually be accepted anywhere a maestro card is.
What does it cost?
After the initial application fee of around £10, there is normally an annual fee of between £4 and £5. (Be aware of those boasting they have no annual fee, as they usually charge a monthly ‘management fee’ instead, which can end up being as much as double the cost per year!) Most also have a fee for withdrawals at ATMs, of around £1.
So who would use it?
A prepaid credit card is ideal for someone who maybe has a little extra each month they would like to store away on a card instead of using their main account card. This way there is no danger of overspending or using money from an account that is designated for other things.
It is also ideal for teens, as a viable alternative to getting them an additional credit card on a parent’s account. Again, there is no danger of overspending or ‘maxing’ out a credit limit, and they can apply for one themselves. The fees are the same whether under or over 18.
For both prepaid and secured credit cards, there is normally a much easier application process than with an unsecured card. There is no credit check, no employment verification etc. However there are fewer benefits or ‘perks’ although some cards have rewards or points programmes, similar to those of normal credit cards.
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