No Credit History? Choose Secured Credit Cards Over Prepaid Debit Cards

Secured credit cards and prepaid debit cards are two financial products geared toward people with no credit or bad credit. However, only one will help you build good credit. Read on to learn the key differences between these two types of cards and which you should use if you have no credit history.

What is a secured credit card?

Secured credit cards are for people with no credit or bad credit who can’t qualify for traditional credit cards. When you are approved, you must put down a security deposit as collateral. The amount you pay up-front will be equivalent to your credit limit. Let’s say you put down $500 as a deposit; that means your credit limit will be $500.

You can then use your secured card like a regular card, making purchases with borrowed money and then paying it back (your deposit is not used to pay for purchases). While it may seem silly at first to only be extended credit by putting down money first, it allows you to show the creditor you are able to pay back what you borrow, making it an ideal first time credit card. With responsible use, the creditor may raise your credit limit without you having to put down more collateral. Eventually, you will get your deposit back and your credit should have improved. Then you can qualify for a credit card that doesn’t require an up-front deposit.

What is a prepaid debit card?

A prepaid debit card is another financial tool for people with no credit, but they work a little differently. They function like debit cards, except instead of being tied to a checking account, you reload money directly onto the card. As you swipe, your balance decreases. Once you’re out of money, you’re out, and it’s time to reload. These cards may be helpful if you don’t have a traditional debit card, but they are often riddled with fees, and they won’t help you build credit.

Why people with no credit history should choose secured cards

The key difference between these two types of cards for people with no credit history is that activity from secured cards is reported to the three major credit bureaus (Equifax, TransUnion and Experian), while activity from prepaid debit cards is not.

This means a prepaid debit card really only gives you spending benefits, such being able to make online purchases and not having to carry cash. Your usage of a prepaid debit card will not help you build credit because no activity is reported to credit bureaus. Your activity from a secured card, on the other hand, is reported to the bureaus. This means when you make smart moves, such as paying your balance in full, paying on time and keeping a low balance, your credit will get better — a benefit that is very important for people who want to eventually qualify for a mortgage or other loan.

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No Credit History? Choose Secured Credit Cards Over Prepaid Debit Cards

Secured credit cards and prepaid debit cards are two financial products geared toward people with no credit or bad credit. However, only one will help you build good credit. Read on to learn the key differences between these two types of cards and which you should use if you have no credit history.

What is a secured credit card?

Secured credit cards are for people with no credit or bad credit who can’t qualify for traditional credit cards. When you are approved, you must put down a security deposit as collateral. The amount you pay up-front will be equivalent to your credit limit. Let’s say you put down $500 as a deposit; that means your credit limit will be $500.

You can then use your secured card like a regular card, making purchases with borrowed money and then paying it back (your deposit is not used to pay for purchases). While it may seem silly at first to only be extended credit by putting down money first, it allows you to show the creditor you are able to pay back what you borrow, making it an ideal first time credit card. With responsible use, the creditor may raise your credit limit without you having to put down more collateral. Eventually, you will get your deposit back and your credit should have improved. Then you can qualify for a credit card that doesn’t require an up-front deposit.

What is a prepaid debit card?

A prepaid debit card is another financial tool for people with no credit, but they work a little differently. They function like debit cards, except instead of being tied to a checking account, you reload money directly onto the card. As you swipe, your balance decreases. Once you’re out of money, you’re out, and it’s time to reload. These cards may be helpful if you don’t have a traditional debit card, but they are often riddled with fees, and they won’t help you build credit.

Why people with no credit history should choose secured cards

The key difference between these two types of cards for people with no credit history is that activity from secured cards is reported to the three major credit bureaus (Equifax, TransUnion and Experian), while activity from prepaid debit cards is not.

This means a prepaid debit card really only gives you spending benefits, such being able to make online purchases and not having to carry cash. Your usage of a prepaid debit card will not help you build credit because no activity is reported to credit bureaus. Your activity from a secured card, on the other hand, is reported to the bureaus. This means when you make smart moves, such as paying your balance in full, paying on time and keeping a low balance, your credit will get better — a benefit that is very important for people who want to eventually qualify for a mortgage or other loan.

---

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How Old Do You Have to Be to Apply for a Credit Card?

From experimental haircuts to questionable wardrobe choices, many people’s teenage years were marked by bad decisions. The good news is that most of those missteps had little long-term impact.

Credit card debt is much less forgiving. Fortunately, the Credit CARD Act of 2009 raised the minimum age to apply for a credit card to 21, unless a parent or guardian cosigns on the application or the applicant proves that he or she earns a steady income.

That said, there are plenty of benefits to establishing a credit history at a young age. Let’s take a look at the options available to people under the age of 21.

Become an authorized user on a parent’s credit card

A teenager can become an authorized user of his or her parent’s credit card at any age. Although the teen can carry and use a card, he or she won’t be responsible for making payments. However, an authorized user’s credit score will still increase slightly every time a bill is paid in full and on time.

Before taking this route with your child, be sure to have a frank conversation about spending limits and smart budgeting. Make it very clear that the card is only for emergency purposes, if that’s the case. Learning the fundamentals of money management at a young age will set a teenager up for success once he or she is old enough to apply for a credit card independently.

Recruit a cosigner for a credit card application

Once a person turns 18, he or she can apply for a credit card if a parent cosigns on the application. This ups the stakes for the cosigner, as he or she will be responsible for making payments if the primary cardholder doesn’t pay the bills on time. What’s more, both people’s credit scores will take a hit if a payment is missed.

Remedying this potential issue by keeping a close watch on your child’s credit card balance is easier than ever. Simply sign up for online access to the credit card account and set up payment alerts. Serving as a second set of eyes on your child’s spending will help ensure that any slip-ups are avoided or quickly corrected.

The takeaway: Adding your teen to your credit card account as an authorized user or cosigning on his or her own application is a great way to introduce them to the world of personal finance. Better yet, making either of those moves will help your teen establish a credit history, which will ultimately make it easier to get better rates on future loans and qualify for the best credit cards.

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How Old Do You Have to Be to Apply for a Credit Card?

From experimental haircuts to questionable wardrobe choices, many people’s teenage years were marked by bad decisions. The good news is that most of those missteps had little long-term impact.

Credit card debt is much less forgiving. Fortunately, the Credit CARD Act of 2009 raised the minimum age to apply for a credit card to 21, unless a parent or guardian cosigns on the application or the applicant proves that he or she earns a steady income.

That said, there are plenty of benefits to establishing a credit history at a young age. Let’s take a look at the options available to people under the age of 21.

Become an authorized user on a parent’s credit card

A teenager can become an authorized user of his or her parent’s credit card at any age. Although the teen can carry and use a card, he or she won’t be responsible for making payments. However, an authorized user’s credit score will still increase slightly every time a bill is paid in full and on time.

Before taking this route with your child, be sure to have a frank conversation about spending limits and smart budgeting. Make it very clear that the card is only for emergency purposes, if that’s the case. Learning the fundamentals of money management at a young age will set a teenager up for success once he or she is old enough to apply for a credit card independently.

Recruit a cosigner for a credit card application

Once a person turns 18, he or she can apply for a credit card if a parent cosigns on the application. This ups the stakes for the cosigner, as he or she will be responsible for making payments if the primary cardholder doesn’t pay the bills on time. What’s more, both people’s credit scores will take a hit if a payment is missed.

Remedying this potential issue by keeping a close watch on your child’s credit card balance is easier than ever. Simply sign up for online access to the credit card account and set up payment alerts. Serving as a second set of eyes on your child’s spending will help ensure that any slip-ups are avoided or quickly corrected.

The takeaway: Adding your teen to your credit card account as an authorized user or cosigning on his or her own application is a great way to introduce them to the world of personal finance. Better yet, making either of those moves will help your teen establish a credit history, which will ultimately make it easier to get better rates on future loans and qualify for the best credit cards.

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Can I Upgrade to an Unsecured Credit Card Once I Reach Fair Credit?

The perfect tool with which to boost your credit score, a secured credit card is an excellent way to learn the ins and outs of borrowing money. But once you’ve reached fair credit — typically a credit score of 630 to about 690 — you may want to upgrade to an unsecured credit card, as this type of plastic typically has higher monthly credit limits and will therefore increase your purchasing power.

Before upgrading to an unsecured credit card, here’s what you need to know to make the process as smooth as possible.

Be aware of your credit card issuer’s policies

Although you can exert plenty of influence by paying your bills on time and in full, your ability to upgrade to an unsecured card may depend on your card issuer. To find out whether you qualify for an unsecured card, be sure to take a careful look at your credit card issuer’s policies and fine print. Some lenders require customers to have a secured card for at least one year before making the switch.

Ask your issuer

Once you’ve determined that you aren’t restricted to a secured card, ask your credit card issuer to upgrade your card. If successful, your card will be upgraded to an unsecured card and your original deposit will be returned to you in full, assuming you don’t have an outstanding balance. If your request is denied, ask your credit card issuer how you can improve your chances of getting an unsecured credit card in the future.

If rejected, consider seeking a new issuer

Another option would be to apply for a new credit card. One word of advice: Every time you apply for a new card, an inquiry is made into your credit history, which shaves a few points off of your credit score. It’s therefore best to apply for a new unsecured card only if you know that your shot of getting approved is good.

In a dream world, other credit card issuers would take heed of your improved credit score and start extending offers your way. If that happens, and your application ends up getting approved, you could shut down your secured account and collect the original deposit. Keep in mind, though, that it would be better for your credit score to keep that account open. If your secured account’s annual fees aren’t too steep and you don’t desperately need those deposit funds, consider keeping it open. Just make sure that the account doesn’t carry a balance, as the interest will add up quickly.

Upgrading to an unsecured credit card is a big step and is proof that you’ve worked hard to improve your credit score. Taking note of the aforementioned tips can help you avoid roadblocks along the way.

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From Poor Credit to Fair Credit: The Road to Improvement

For many, the difference between having bad credit and average credit is like night and day. With fair credit, searching for a place to live or shopping for a car suddenly becomes much easier. You can even qualify for lower interest rates with fair credit credit cards, which could save you a bundle in the long run.

If you’re looking for ways to boost your score, here’s where you should start:

Identify the problem

If you don’t know why your credit score is low, it’s difficult to fix it. Start by requesting a free annual credit report from each of the three credit bureaus — Experian, Equifax and TransUnion — and looking for problem areas.

Some items, such as like foreclosures and bankruptcies, will stay on your credit report for seven years, and there’s nothing you can do about it. But if your score is taking a dive because of late payments, make a point of being more punctual with your bills. Because recent credit activity is weighted more heavily than old activity, making a small change like this could make a big difference.

Build an emergency fund

Relying too much on credit during hard times can lead to over-borrowing, large outstanding debts and late or missed payments, which can hurt your credit. Avoid returning to these bad habits by establishing an emergency fund.

Put aside a small amount of your earnings every month. Even if it’s just 2% a month, you’ll have more money to fall back on the next time you have to deal with one of life’s little surprises.

Get a secured credit card

To qualify for a fair credit credit card, you need to build up a good credit history, and a secured credit card is a good place to start. Because these credit cards require a security deposit as collateral, they’re easier to qualify for. Find a credit card that reports to all three credit bureaus, and your on-time payments will help you build your credit.

When it comes to rebuilding your credit, let consistency be your watchword. Make sure your recent credit history reflects your best habits and guard against using your credit card for things you don’t really need. By spending less than 30% of your credit limit and paying on time every month, you’ll boost your score and lenders will start to look at you more favorably. After awhile, your card issuer might offer to upgrade your account to an unsecured card.

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Can I Upgrade to an Unsecured Credit Card Once I Reach Fair Credit?

The perfect tool with which to boost your credit score, a secured credit card is an excellent way to learn the ins and outs of borrowing money. But once you’ve reached fair credit — typically a credit score of 630 to about 690 — you may want to upgrade to an unsecured credit card, as this type of plastic typically has higher monthly credit limits and will therefore increase your purchasing power.

Before upgrading to an unsecured credit card, here’s what you need to know to make the process as smooth as possible.

Be aware of your credit card issuer’s policies

Although you can exert plenty of influence by paying your bills on time and in full, your ability to upgrade to an unsecured card may depend on your card issuer. To find out whether you qualify for an unsecured card, be sure to take a careful look at your credit card issuer’s policies and fine print. Some lenders require customers to have a secured card for at least one year before making the switch.

Ask your issuer

Once you’ve determined that you aren’t restricted to a secured card, ask your credit card issuer to upgrade your card. If successful, your card will be upgraded to an unsecured card and your original deposit will be returned to you in full, assuming you don’t have an outstanding balance. If your request is denied, ask your credit card issuer how you can improve your chances of getting an unsecured credit card in the future.

If rejected, consider seeking a new issuer

Another option would be to apply for a new credit card. One word of advice: Every time you apply for a new card, an inquiry is made into your credit history, which shaves a few points off of your credit score. It’s therefore best to apply for a new unsecured card only if you know that your shot of getting approved is good.

In a dream world, other credit card issuers would take heed of your improved credit score and start extending offers your way. If that happens, and your application ends up getting approved, you could shut down your secured account and collect the original deposit. Keep in mind, though, that it would be better for your credit score to keep that account open. If your secured account’s annual fees aren’t too steep and you don’t desperately need those deposit funds, consider keeping it open. Just make sure that the account doesn’t carry a balance, as the interest will add up quickly.

Upgrading to an unsecured credit card is a big step and is proof that you’ve worked hard to improve your credit score. Taking note of the aforementioned tips can help you avoid roadblocks along the way.

---

Woman with credit card image via iStock.

The post Can I Upgrade to an Unsecured Credit Card Once I Reach Fair Credit? appeared first on NerdWallet Credit Card Blog.

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