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Distinction between unsecured, secured and prepaid credit cards

Life without credit cards is difficult to imagine. Credit cards have become bare necessities of life. Without these credit cards, it is difficult to imagine how one can manage purchases, loans; mortgages etc., With the proliferation of internet, possessing credit cards have become even more necessary. Advantages and disadvantages of owning credit cards are easy to understand. Persons with good credit history and credit records have no problem owning many credit cards. But if there have been problems with credit rating and credit history not being good, then the disadvantages seem to be more critical.

Credit cards are of 2 major types – secured credit cards and unsecured credit cards. Pre-paid credit cards are a sort of secured credit cards but with slight a variation in the way the funds are loaded on the credit cards.

Secured credit cards are issued against a secured amount which deposited into an account in the bank. The limit on these secured credit cards is determined by the amount held in deposit. This deposit is used as a cover in case there is a default in payment by the owner of a secured credit card. Pre-paid credit card is similar to a secured credit card but the only difference is that the prepaid credit cards are loaded with the pre-paid amount. As the person spends money using these prepaid credit cards, the balance amount on the credit card keeps coming down. In a secured credit card there is no such prepaid amount loaded. Instead when the total amount outstanding against a secured credit card reaches the limit set by the issuer of the credit card, which is usually the secured amount held in deposit, the card gets disapproved for further purchases and spending. Secured or prepaid credit cards are good for people who want to establish credit history and build credit records. For anyone to raise a huge loan later in life, say for like buying a home, credit history and credit records are extremely important. For those who failed to pay off debts and thus lost their credit rating, secured credit cards is one way of rebuilding their credit history. Credit records get into credit reporting agencies database and get included in credit reports. Any bad records would spoil the credit rating and hence it is important to maintain a good credit profile.

Unsecured credit cards, which form the major chunk of today’s credit cards business, are those that are used by anyone who has a good credit report and good credit records. Anyone who pays of debts on time will stand to get credit card offers, almost every day, from card issuers. Money is out there to be given as credit to those who want it, but the credit card companies would love to give the credit to those who have been regular in their payments. With competition being severe in this credit card business, it is no wonder the credit card offers come with many benefits to those highly rated users. Credit card offers of ZERO interest for an initial period, low % on balance transfers, low annual fee, air miles, discounts, cash backs, discounts on gas purchases, auto rental insurance and other benefits are common with these unsecured credit card offers. Many people use these credit cards just to get all the benefits that are associated with these credit cards. People who have been used to pay off monthly bills through bank account are switching over to credit cards just to avail the benefits offered by the credit card companies. Disciplined use of credit cards saves a lot of money. But if the spending is not controlled, then the problems increase leading to bad credit report and records.