Understanding Credit Cards: Part II

Credit cards may be either secured or unsecured. Secured cards require that the cardholder deposits a certain amount of money as security to the bank, prior to receiving the card. In the event that he or she should fail to make payments, the bank may seize the deposit as “payment”. It usually is taken out by individuals with credit problems who may not be able to get an unsecured card. Secured cards look the same as other cards, and provide consumers with the same protections under the law.

Most credit cards are unsecured cards, and do not require cardholders to deposit money as security. Obtaining an unsecured card may require an adequate credit history. If someone with a poor credit history does receive an unsecured card, it probably will have a very high interest rate.

Because secured cards are less risky for lenders to provide than unsecured cards, they sometimes have lower interest rates. Even those who are eligible for an unsecured card may be interested in a secured card for this reason.

You may have heard an offer for a “guaranteed card”, and this is a type of secured card. Instead of being provided by a bank, however, such cards are offered through 900 numbers. They sometimes require an application fee, and almost never are the best option when looking for a credit card.


Beyond Credit Cards

In addition to credit cards, debit cards and ATM cards are common tools. Debit cards look like credit cards, and generally work the same way when one makes a purchase, but their functionally actually is opposite. Rather than charge up a bill that must be paid at the end of the month, debit cards automatically withdraw money from your bank account when you make a purchase.

On the one had, debit cards are very convenient, do not involve interest fees, and help to safeguard against racking up more costs than you are able to pay. On the other hand, however, purchases or identity theft issues can be difficult to resolve once the money has been withdrawn from your account, and loss or theft can allow someone to drain your bank account.

An ATM (automatic teller) card is a card that you use at an ATM machine to withdraw funds from your bank account. It is much more similar to a debit card than a credit card, in that you only may access funds that you already possess. It is not as risky to lose as a debit card, however, because no one can use it without knowing your personal identification number (PIN).

Other Considerations

• When you apply for a credit card, the APR and all fees, including over-limit or late payments fees, must be disclosed to you up front under the Fair Credit and Charge Card Disclosure Act.

• Application fees are very rare. While they are legal, you almost certainly can fine a better card offer that will not require you to make this payment.

• You may not receive the same interest rate or options as someone else who has a card from the same company. This is because banks set their own terms and conditions for the cards they provide.

• You may request that payment for your credit cards be taken through automatic withdrawal from your account. It is safe and convenient, but some borrowers prefer to feel more in control of the situation.

• Only have as many credit cards as you need. If you have more than is necessary, it is easy to charge-up more than you can afford.

Credit cards offers are everyone, so it is important to understand your options. Credit cards, debit cards, and ATM cards can be very convenient, useful, and responsible, so long as you understand how they fit into your financial goals.

Go to Part I of this article.