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Sometimes, financial mishaps happen that negatively impact personal credit scores. A tarnished credit history can be difficult to overcome, especially if a person did not have a credit history to start with. With poor or no credit history, it can be difficult to qualify for financing of any variety. And if a lender will accept, they charge a steep interest rate that greatly increases the total amount paid for a purchase. To help give consumers a second chance at establishing credit, Green Dot, is introducing a secured credit card which is a big step towards earning a better rewards credit card.
How Secured Credit Cards Work
A secured credit card derives its name because a security deposit equal to the credit limit is required before the card can be used. The traditional credit card, an unsecured credit card, does not require a security deposit and normally have significantly higher credit limits that might be as high as $10,000 to $15,000.
As secured credit cards are intended for more “risky” credit profiles, those with no or poor credit scores, they are typically more expensive than unsecured credit cards because most charge an annual fee and have interest rates near 20% on unpaid monthly balances. And secured credit cards do not earn purchase awards like most unsecured credit cards do.
Due to the lack of available credit for those that have a low credit score, typically 600 or below, the most common payment method is cash or debit cards because no credit score is required for either payment method. As we live in a digital society, most people are more likely to pay for large purchases with a debit card than giving the cashier several $100 bills.
Paying with cash or debit can be very beneficial in preventing consumer debt because the consumer can only spend the balance currently in their wallet, but, cash and debit payments do not improve credit scores.
This is where the Green Dot Platinum secured credit card enters the picture. A secured credit card is very similar to a prepaid debit card as you can only spend up to the credit limit before future transactions will be denied, but a credit card reports the monthly activity to the three major credit bureaus.
To continue using a secured credit card, the consumer needs to pay the balance in full each month. By making on-time payments, their credit score will gradually improve. However, missing payments will lower the credit score even more and can cause the credit card issuer to cancel the card.
Introducing the Green Dot Platinum Visa Secured
Green Dot already has a prepaid debit card and its launch of the Green Dot Platinum can greatly help the estimated 108 million Americans have no or low credit scores. A secured credit card can serve as the bridge that helps these Americans finally able to qualify for the affordable credit.
Applicants can apply for pre-qualification at Green Dot’s website. If approved, Green Dot will determine a credit limit ranging from $200 to $1000 that is backed with an equal security deposit amount. For example, a $500 credit limit requires a $500 security deposit. The security deposit and monthly payments can be made at over 100,000 national locations at the following retail locations:
- 7-Eleven Convenience Stores
- Rite Aid Pharmacy
- CVS Pharmacy
- Walgreens Pharmacy
When paying in person, there might be a transaction fee up to $4.95. The Green Dot is unique because it makes it convenient to pay the monthly bill instead of having to remember to mail the payment in. As the Green Dot Platinum does not require a bank account to open the credit card, in person payments might be the easiest way for many cardholders to make the monthly payment on-time.
Approved applicants can also mail the security deposit, at no additional fee, but it will take an additional 10 days to process the transaction. In addition to owning a credit card valid anywhere Visa is accepted, cardholders also have access to free online account management access and Bill Pay. Users will also have to pay a $39 annual fee and a 19.99% APR on all late balances, both of these rates are the current industry standard for secured credit cards.
Using Secured Credit Cards Properly
As credit card debt is one of the leading reasons credit scores might have been tarnished originally, some might be hesitant to apply for Green Dot’s new secured card and continue using a prepaid debit card.
To avoid future credit card woes, it is recommended to only use a secured card for essential purchases such as a cell phone bill or gas that will not increase the monthly budget. Strive to only use up to 20 or 30 percent of the credit limit monthly and pay the bill in full each month. After 12 months of timely payments, it might be possible to increase the credit limit, plus, the credit score will incrementally increase.
As Green Dot reports payment activity to the three major credit bureaus, this will also be beneficial when applying for unsecured credit cards or loan financing in the future. When financial lenders review an applicant’s credit history, they normally only receive information from one of the three agencies.
The entire reason to use a secured credit card, instead of a debit card, is to establish a positive credit history. Lenders and bureaus will not know about timely payment history if the credit card company keeps the information to themselves.
Author: Jeff Gitlen
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