Secured versus pre-paid credit – do you know what you’re getting? When I am giving a talk, I can see that many people don’t know the difference between them. Let me tell you the facts:

Secured Credit

With Secured Credit, the bank has placed a set amount of  your own money in a special savings account that it controls. If you default on your debt, the bank can use the savings account to recover its losses. Your credit limit is always equal to the amount in the special savings account. Just like a traditional credit card, you will pay interest and receive a monthly bill.

A secured credit card is for someone who can’t get a traditional credit card. If you have bad credit or no credit at all, secured cards are a great way to establish your history. If you still don’t understand what a secured card is, think of it as a security deposit on a rental. The landlord holds that deposit and can keep it if you don’t pay.

As with any financial transaction, read the fine print before moving forward and make sure that the lender reports your information to the credit reporting agencies. Watch out for fees and make sure you understand them fully.

Pre-Paid Cards

With pre-paid credit cards, you simply load the card with money and use the card to make purchases. There are no bills or interest rates on purchases. The spending limit is always the current deposit balance on the card. In that sense, it works like a debit card, yet it has all the consumer protections of a credit card.

Pre-paid cards are often used as gifts and by people who want to avoid spending beyond their budget. You might use one on your next vacation or as a gift for your favorite college student. The consumer protections and the built-in spending limit make this card ideal for those two scenarios.

The fees can be expensive! Credit card companies make their money with the fees – activation fees, monthly fees, reload fees, etc. You might want to consider other alternatives for every day use.

Now you know the difference between them. Make sure you understand them and pick the right choice for you.

Question: Which financial institution created a credit card based on an urban legend?

(The answer to our trivia question is at the bottom.  But first, let’s talk about your credit cards.)

Are your credit cards right for you? If you’re not sure, here are some key points you can compare to determine which product is right for you.

Is the interest rate fixed or variable?
If you carry a credit card balance, you will want a fixed rate. If you pay in full each month, the rates won’t matter.

Will you use the card for purchases, balance transfers, or cash advances?
Your credit card company will apply a different rate for each transaction, so pick the right card with the right rates for your financial plans.

Is there an annual fee just to have the account?
You may not want an annual fee. However, if the annual fee covers your membership to a discount service or store (like a big box store), you may find that it’s worth it.

Ask about any other costs or fees.
Look for late fees, membership fees, over limit fees, returned payment fees,  etc).

How is the billing cycle calculated?
Does the due date suit your monthly budget? If the card is due on the same date as your mortgage, that could cause trouble.

Your credit cards should work with the way you spend money and pay bills. Don’t let your cards cause you more trouble than convenience.

Trivia Question Answer:
The (virtually) no-limit credit card, the Centurion, was created by American Express for no other reason than the persistent rumors that it actually existed. This card is obviously meant for the rich and famous. For those of us with bigger dreams than budgets, a no-limit card would be a disaster. Fortunately, the Centurion is issued by invitation only.