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Building a Credit Score with “Debit Cards in Disguise”

No credit check credit cards are becoming more popular today as people with credit issues and/or financial setbacks work toward building up their credit. Given the state of the economy, many people have suffered financial problems and are working to rebuild their credit. Some companies are taking advantage of that, so choosing a credit rebuilding strategy means doing some homework.

Several types of credit cards are available for people with bad credit, but manyof them are little more than debit cards or pay-as-you-go plans. I want to show people to how build their FICO score while paying the bills or spending at the department store. This involves more than glorified prepaid cards. Establishing credit of some type is a necessity for anyone who wants to own a home or buy a car, so it’s essential you change not only your spending habits, but your basic way of doing business.

First, let’s take a look at what you should avoid, if your goal is to build a credit score.

Debit Cards by Another Name

Woman in Disguise

Some credit cards are not more than debit cards in disguise.

Many of these “no credit check credit cards” are nothing more than a debit card. They secure your purchases by using a bank account or a deposit. These deposits are kept for you in a special account which is used to pay for your purchases as they take place. While they are not an actual “credit” card, they can be helpful in building or rebuilding your credit score.

Stop Gap Credit Cards

Some credit cards do not require a deposit to secure them, but they begin with tiny credit limits, high fees, and high interest rates. This makes them a stop-gap solution. Use this kind of credit card to build your credit, and then pay it off right away.

The interest rates and fees are going to be high on these cards, which are often marketed as student credit cards. These are the personal finance equivalent of the starter pistol, with a similar potential for mischief. The idea is to pay these debts off quickly, then move on to a more graduated form of lending. Student cards are a gateway into the wider world of finance.

Minimum Deposit Credit Cards

This type of no-credit check credit card requires a minimum $300 to $5000 deposit in a bank account. This amount is the credit limit you receive. The funds are NOT used to pay for your purchases, but they are held as security in case you default. You pay the bills each month as you would a regular credit card, at a rate of about 19% interest.

Once again, this is a handy program to join, but the drawbacks are immense. Only accept these offers when you have no other options. It might be an odious bargain to make, but eventually, you can buy your way into better financing.

Keep in mind the deposit is dead money for the length of time is stays in the bank account. You won’t be able to use it. In essence, it secures the loan as a form of collateral.

How the Credit System Works

How do these credit cards work, what’s the catch, and can they actually help you to build credit up over time? Is the price of the card more costly than the credit it helps you to establish?

These “debit cards in disguise” options are your best bet. The security funds are moved into your account as you need them to pay for purchases. You pay no interest, but you do pay a monthly fee of $6.95+. They report monthly to the credit agencies, which builds up your credit rating while spending your savings. Chalk the fee up to the cost of building a better credit rating.

The secured credit card where you use your own funds as security for your card credit limit is our least favorite option. You deposit between $300 and $5000, but you’re not permitted to touch the amount for any reason. The card gives you as much credit as you will keep funds in the account. You pay for your purchases at the end of each month, and the monthly fees and the rate of interest does not reflect that the card is secured.

Many of these cards have a monthly fee as well as interest rates. You’re paying a $7+ per month fee for the privilege of having a credit card, which is reasonable. What’s unreasonable is the nearly twenty percent interest for the use of money that you have in a bank account.

Avoid outrageous interest rates on secured credit lines. You shouldn’t have to pay 20% interest to use your own money. Put your $5000 into a savings account and spend it wisely instead. You’ll save lots of money in interest and fees, and you’ll earn a little bit of interest each month.

You can use this solution to teach your children how credit cards work. And you can use this solution to build your credit score. But this isn’t a cost-effective way to manage your finances.

Building the Credit Score with High Rates

The high interest rate/tiny credit line cards also report monthly to the three major United States credit bureaus, and they do offer you an unsecured line of credit of $250 to $500. This is perfect for college students and/or the credit-challenged. These cards charge high interest rates (19-20%+), but high interest rates in exchange for an unsecured line of credit makes more sense. And as you build your credit score, you can graduate to lower interest, higher limit credit cards.

Use your credit wisely, build a good history of timely payments, and use credit cards only when you need to. In no time at all your credit will be built or rebuilt, and you can transfer the balances of your higher interest credit cards to cards which carry a lower rate of interest.

Always read the fine print prior to signing on the dotted line. Comparison shopping is just as intelligent and necessary when shopping for a credit card as it is when shopping for any other goods or services.

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