When credit cards first emerged on the scene in the late 1950s, they were straightforward and easy to understand. You used them to buy goods or services on credit, and you paid the balance when the credit card bill came in. Since then, the number of companies offering credit cards has exploded, and the types of cards and benefits offered have become more complex.
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Three new types of credit cards are popular with customers who want to reduce the fees they pay or build up their credit.
Secured Credit Cards
A secured card operates like a hybrid of a credit and debit card. The customer deposits a certain amount of money, usually from $250 to $1,000, depending on the card. This money is held by the card company to cover credit charges if they go unpaid. The card holder has access to "credit" in the amount of the deposit. The biggest benefit of secured cards is that the company will report the credit history to credit bureaus. This allows people with poor credit histories to obtain a credit card and begin rebuilding their credit score. Not all companies offer secured cards and some charge exorbitant fees. As with applying for any other type of credit card, it's important to review all the fine print before signing.
Credit Union Cards
Many credit unions offer credit cards to their customers. Credit unions are non-profit organizations owned by their members. Because credit unions do not have to generate profits for shareholders, credit union cards usually offer lower fees than big bank credit cards. The trade-off is that these cards often don't offer the bells and whistles that bank cards do, such as reward points or cash back. For budget-minded customers, however, credit union cards are a good choice.
Prepaid credit cards operate slightly differently than secured cards. They are technically a debit card, where holders load the card with as much money as they wish. They can use the card as they would a credit card, but only up to the amount that has been pre-loaded. One of the largest providers of prepaid cards is Walmart, which offers financial services through its Money Centers. Prepaid cards work well for those who cannot get any type of credit but still need a credit card. Some transactions require a credit card, such as booking rental cars and hotels. The downside of this type of card is that issuers generally do not report activity to credit bureaus.
The Bottom Line
Every consumer's financial needs are different, and they should look for the card that best suits their needs. Regardless of the type of card you apply for, be sure to read all the details of the contract, including all the fees and interest charges, so you know what to expect. Cards that look similar at first glance could charge you a difference of hundreds of dollars a year. Credit card companies often use teaser rates to draw you in and then they bump the rate higher after the introductory period is over.
Those with bad credit scores will find their options limited, but they could increase their credit scores through a secured card. Consumers who want low card fees should avoid cards that offer peripheral benefits, such as air-miles or other reward points. More versions of credit cards will appear in the future, with various options for card holders. Analyzing card features up front will pay off in the long run by providing you with a card that meets your needs.