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People who have tried to get a credit card in the past and have been rejected due to poor credit or a lack of established credit history may turn to secured credit cards, sometimes known as pre-paid credit cards. These cards are similar to traditional unsecured credit cards in that they may be used for the same type of purchases as unsecured cards.
Those who use pre-paid cards will pay, though. With pre-paid cards it seems like there are fees for everything. And these fees are often not conspicuously disclosed.
Common Pre-Paid Card Fees
These pre-paid card fees include, but are not limited, to:
- Set-up or activation fee
- Per transaction charge
- Recurring monthly charge
- Annual fee
And remember, too, that these fees will be added to your credit card balance, limiting the amount of money you can actually “borrow,” or spend, with the card.
Here’s a detailed look at some of the fees you may have to pay, and pitfalls to avoid.
Activation fees vary among pre-paid cards. Some activation fees can be as little as $3, while other companies may charge up to $29.99.
Until the card is activated, the customer may not use it for any purchases.
There are some secured companies that offer an initial credit limit of $200 then charge $150 in activation and application fees to the account. If the customer accepts the card, activates it, and never uses those types of cards they will still be responsible for paying back the initial charge.
Pre-paid credit cards have monthly fees of about $5 per account. This fee is referred to as the monthly maintenance charge. As long as the card is active there will be a monthly fee.
This can place the account holder in a negative balance if enough finances are not added to the account each month to cover the monthly charge.
Some progressive secured card companies offer to waive the monthly maintenance fee if the consumer chooses to have their wages direct deposited into the account.
Per Transaction Fees:
You’re probably familiar with the transaction fees associated with ATM withdrawals using traditional credit and debit cards. There are some fees charged by certain creditors when a credit or debit card is used.
With pre-paid credit cards, some of the companies that offer the accounts charge a fee for every transaction made.
This does not include only cash advances or withdrawals; the fees are added to the account with every single purchase the customer may make.
In some instances, you may even be charged for checking their account balance or for using customer support more than a certain number of times.
How Your “Credit Limit” Works
The “credit limit” on pre-paid credit cards depends on the amount of money deposited into an account – making it function like a checking account or secured credit card, and not like an unsecured credit card.
Almost all of these cards are paired with a routing number, enabling consumers to use the cards as an electronic checking account. Some offer discounts on fees if direct deposit is activated.
In fact, that is a big part of the attraction for many consumers of pre-paid cards. Especially ones who have trouble opening checking accounts or getting credit cards because of prior credit events.
Can You Build Credit?
Individuals with poor credit are the target demographic for pre-paid credit cards. These consumers are unable to qualify for a traditional credit card.
And, yes, prepaid cards are functionally similar to secured credit cards. But usually without any credit building abilities and with way more fees.
But this is changing. In some instances, pre-paid card issuers are actually trying to distinguish themselves from the competition by report to credit bureaus.
A new marketing strategy used by secured credit card companies is to advertise to those with poor credit as a way to increase their credit score. Those companies that report to the three major credit reporting agencies can help increase credit scores.
But there are a few traps that consumers should be aware of before choosing a pre-paid card.
First, make sure the secured credit card you choose reports to all three major credit bureaus (Experian, Transunion and Equifax) and that your timely payments will increase your FICO scores for all three bureaus.
CreditShout recommends the Orchard Bank Secured MasterCard as the best secured credit card for people with poor credit or no credit history.
Read the Fine Print
The key to using a pre-paid credit card is to read the fine print very carefully.
Like traditional cards, there are companies that are a better fit for one consumer compared to another. A close watch on the account balance and fees will help you from going over your credit limit.