If you have poor or no credit, you'll want to know what credit options are available to you, not only to have credit, but to improve or create your credit score.
Secured credit cards are one option. These cards essentially let you become your own lender. You put a certain deposit down on the card, say $500, and then you're allowed to charge using a secured credit card. (Your available credit may be the amount of your deposit or a higher amount, depending on the card issuer.)
Why Secured Credit Cards Instead of Prepaid Cards?
The goal for most people is to eventually move up to an unsecured credit card. To do this, you need to establish good credit by paying your card payment on time AND having the card issuer report your payments to the credit bureaus.
While many secured credit card issuers report back to the credit bureaus, issuers of prepaid debit cards don't, so you can't establish or improve credit when using them. (Be careful because even some secured credit card issuers don't report to the credit bureaus. Make sure the secured credit card you take out does.)
As your credit improves, in about 9 to 12 months, you can apply for an unsecured credit card. Don't do this too early, though, because every time you apply for credit, your credit score is pulled. Do this too often, and it can lower your overall credit score.
Secured Credit Cards in 2013
We'll likely see many people continue to take out secured credit cards in 2013. Thanks to the CARD Act, getting a credit card if you're under 21 is tough. A secured card is a nice alternative and helps college students build credit.
Also, as the economy rebounds, more and more people will get back on their feet financially speaking and will look to rebuild their credit. Again, a secured credit card is perfect for that.
Since the Durbin Amendment limited the interchange fee on debit cards, banks have been targeting secure credit cards as a way to recap some of their lost profits. Likely, the government may turn to passing new laws in regard to secured credit cards because now they're largely unregulated.
As a secured credit card user, shop around carefully for a card. Some have very high interest rates, but finding a secured credit card with reasonable interest rates is still possible.
Alternatives to a Secured Credit Card
If you're looking to improve or create your credit score, there are, of course, other options besides a secured credit card.
Take out a loan on your CD. Another alternative is to put some money in a certificate of deposit and then take out a loan from the CD. You'll make monthly payments to the bank and establish or improve credit, as long as you pay on time. Keep in mind though, you'll likely pay much more in interest on the loan than you'll earn on interest having the money in a CD. Still, if you need another option to a secured credit card, this can be one.
Become an authorized user on your parents' account. If your parents have good credit and you're in college, you may consider asking if you can be an authorized user. Being an authorized user will help you establish your own credit by spring-boarding off your parents' good credit. (Of course, don't do this if your parents have bad credit. It is easy enough to end up with bad credit; you don't need to start your credit history that way!)
While secure credit cards are often seen as a product for those with bad credit, they can also be a good stepping stone for those looking to establish credit (or those under 21 who may find it difficult to take out a credit card after the CARD Act.) Just make sure the card you use has reasonable rates and reports to the credit bureau so you can eventually move to an unsecured card.