The choice, of course, depends upon the purpose of the card.
If you are getting the card for the purpose of building your credit, get a secured card or a high interest card. If you wish to give a gift, get a prepaid card.
Secured credit cards are treated just like unsecured cards in the eyes of the credit bureaus, and your balances and payment record will count toward building a credit score. Prepaid cards are not reported at all, so are not a tool in building credit.
The choice of a secured card or a high-interest credit card might depend upon your cash on hand or the help available to you.
A secured credit card is a tool that enables a relative or friend to help you build your credit without risking their own. If you don’t have the cash available to set up a secured account, they can make a loan to you for the amount needed to deposit in the secured account.
Once you establish a good record of minimal use combined with prompt payment, your own credit scores will rise and you’ll be eligible for a low risk, lower interest card of your own. At that time, the secured account can be converted to an unsecured account, and the deposit will be returned to you, with interest. Then you can repay the relative or friend who helped you.
Of course, as with any credit card, running the balance too high or failing to make every payment on time will have a reverse effect – it will lower your credit scores.
If you have no one to offer this kind of assistance, consider getting a high-interest card and using it so wisely that you’ll soon qualify for a lower interest card. Some of these cards do require an annual fee, and that fee varies widely from card to card, so read all of the offers carefully. Don’t automatically assume that the best card is the one advertised in that offer in your mailbox. In all likelihood, that is the worst one!
Because they are all high interest, plan to use the card very little and pay the balance in full each month. Use it for a purchase you would have made anyway – such as a bag of groceries. Be sure to stay under 10% of your available credit and mail your payment the same day the statement arrives in your mailbox.
All of the earliest credit cards were “closed loop” cards. That meant that a three-way relationship existed between one specific bank, the consumer, and the merchant.
Diners Club and American Express cards, for instance, were issued to a select group of consumers and could be used only at merchants who chose to participate in the program. Early cards issued by banks were available only to that bank’s customers and were good only at local establishments.
While Diner’s Club remains in the closed loop, American Express has chosen to join the open loop system, which requires interbank cooperation and funds transfers.
Discover Card, first introduced at the 1986 Super Bowl, also began as a closed loop card. Originally a part of the Sears Corporation, Discover Card Services sought to create a new brand with its own merchant network.
These three, in an effort to boost revenues, expanded into the open loop network, but not without some trials along the way. Although these cards were gaining merchant acceptance, individual banks were locked into an exclusive agreement with Visa and MasterCard.
Finally the U.S. government and the Department of Justice became involved, and a 2004 antitrust court ruling against Visa and MasterCard allowed banks and other card issuers to provide customers with American Express and Discover Cards.
Not all establishments choose to accept American Express and Discover because of the additional set up and maintenance fees. But consumers carrying these cards can rest assured that their cards will be accepted anywhere the logos are displayed.
Now, although Visa still holds over 50% of the market share of credit card transactions, Discover Card is a major player in the Open Loop credit industry. Discover boasts a wide variety of cards for consumers with poor to excellent credit and offering a variety of rewards cards for students, businesses, frequent travelers, and more.
So who offers “Closed Loop” cards?
Gas companies and retailers such as Sears, Staples, and others whose cards are accepted only at their company outlets. These closed loop cards can be beneficial to both the stores and the consumers who use the cards regularly. The rewards, which can be substantial, give added incentive to use that brand rather than another.
For instance, Staples offers a rewards program (for those cardholders who apply) which gives money back on purchases – and gives extra when Staples own brands are purchased.
Back in the dark ages of credit card purchasing, merchants taking your card had to worry. Would the charge be approved, or would it be rejected?
If the person taking your card was an employee at a store and your charge was rejected and charged back to the store, would the employee be fired? They could be, if they had failed to follow procedure. Back then, merchants received a little booklet, printed on flimsy paper, that listed the account numbers of cards that they would not honor. Clerks were supposed to check to make sure your account number wasn’t listed in that book before they let you walk out the door with a purchase.
If your purchase was over a set amount – as I recall it was $50 – they were supposed to call in for approval.
Talk about a cumbersome process – and a frustrating one if other customers happened to be waiting in line behind you. Sometimes they didn’t bother, and sometimes it cost them money. Oh, they could try to collect from you, but if the amount was small it wouldn’t be worth the legal fees and hassle, and if you’d left town… The worst they could do to you was destroy your credit, which didn’t get their money back.
Next came the little “swipe” machine that took your number, checked it, and either approved or disapproved. It took a few minutes, but was easier than looking up numbers and making phone calls.
But now – all that happens in a matter of seconds.
When you hand your card to a clerk to swipe, or swipe it yourself at the check-out counter, the machine instantly sends a message to the merchant’s bank. That bank then instantly sends a request to MasterCard or Visa – who instantly sends a request to your individual card issuer. Assuming the charge is approved, those instant messages go back through the same route, you sign the charge slip, and go on your way with your purchase.
This all happens so quickly that you don’t even notice a delay, and no one behind you is left twiddling their thumbs.
When you order over the phone, the process takes a second or two more, because a human has to key in the information that you provide.
But convenience isn’t free. Your merchant pays a monthly fee for the privilege – even if no customers use a charge card in a given month. That’s why it’s more cost-effective for many small businesses to use a service like Pay Pal – they take a higher percentage of each transaction, but there’s no monthly fee.
Merchants also pay a percentage of each transaction. For most mid-size merchants, the fee is about 2%. It can be higher for small businesses that use the service less frequently.
So, while you’re standing there waiting to sign your receipt, three different banks are “talking about you behind your back.” It’s nice when they’re only saying good things!
Historically, each credit card issuer has operated its own credit-management program for cardholders in financial distress, but the current economic crisis has brought them together.
Along with payments networks for MasterCard and Visa, Bank of America, Capital One, Citigroup, and Discover are participating in the program.
According to a report by the Fitch Ratings Credit Card Index, credit card charge-offs were 40% higher in January 2008 than January 2007, and the number is expected to rise. A charge-off occurs when a company gives up on trying to collect a bill and sends it to a collection agency. This typically happens when a bill remains unpaid for 6 months.
Card issuers are now reaching out to consumers to help them get back on track after missing a payment or two, or after a change in their financial situation. Issuers are offering customized solutions for individual cardholders – such as a reduction in interest, a waiver of late or over-limit fees, and lower fixed-payment plans.
The new service, called the “Help With My Credit” program, is aimed at providing assistance and education. Consumers can either visit helpWithMyCredit.org or call 1-866-941-1030. This is a toll-free number.
Depending upon the individual situation, operators will either direct the caller to a credit counseling agency or to a customer service representative with a credit card company.
The new work-out programs offered by these credit card companies can help consumers avoid the credit-damaging effects of a charge-off, and will of course help the credit card companies as well.
Interest rates in the 30% range, late payment fees of $39 per month or more, and similarly high over-limit fees can double a consumer’s debt in a few short months of non-payment.
Of course credit card issuers would prefer to collect the penalty fees and the high interest. However, they are willing to forgo collecting those extra dollars as an alternative to charging-off the debt. When an account is transferred to a collection agency, the card issuer receives pennies on the dollar, while the consumer still owes the full amount – interest, penalties, and all.
Credit card holders in financial trouble should note that even when the debt is charged-off their phone will continue to ring. The difference is that it will be a collection agency calling rather than the card issuer.
Thus, the work-out plans can be a win-win. They reduce the debt owed by consumers while ensuring that more dollars get back to the credit card issuers. The only “loser” in this scenario is the collection industry, because it is removed from the transaction.
