The Subprime Guide to Plastic

Secured Credit Card

Choose a card that reports to all three credit bureaus and you’ll have a chance to improve your credit history. With a secured card, you make a deposit in a bank account and this amount becomes your credit limit, less any fees that apply.

You then get a credit card—and, yes, this is a real credit card—and you use it as you would any other credit card. In most cases, there isn’t anything on the card that identifies it as a secured credit card. In the meantime, your “secured” deposit stays in the account. If you don’t pay your credit card bills, the issuer can take your deposit.

Pluses: Use this card responsibly, and you can rebuild your credit history. Pay your bills on time and pay off your balance every month, and over time your credit score will improve. Also, since this is a credit card, you get consumer and fraud protections.

Minuses: Some of these cards have excessive fees, so you have to choose a card carefully. Read the fine print. Most of these cards do have a purchase APR, so if you don’t pay your balance off every month, you’ll incur interest expense.

[Resource: Tips for Paying Off Credit Card Debt]

Prepaid Debit Card

These cards are often used by consumers who don’t have bank accounts, which appears to be a growing part of the population. An FDIC survey in 2009 showed that nearly 9 million Americans are unbanked, which means these individuals have neither savings nor checking accounts.

You load money onto the account and every time you use your card to pay for a purchase, the amount is deducted from your card’s balance. Sometimes, you’ll see an article that calls these cards “prepaid credit cards.” If the card is prepaid, it’s your own money you’re spending. You’re not buying items on credit. I think some cards are mistakenly called credit cards because of the Visa or MasterCard logo emblazoned on the plastic. But a prepaid Visa or MasterCard is a debit card, not a credit card.

Pluses: If you don’t have a bank account, this is much safer than carrying around cash. The amount you can spend is limited to the amount you load onto the card. You can use the card for online purchases.

Minuses: These cards don’t improve your credit history. The fees can be excessive and they vary by issuer. Read the fine print carefully. Most of these cards offer less purchase and fraud protection than what you get with a credit card.

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