The Subprime Guide to Plastic

If you have a FICO score below 660, you’re typically considered to be in the subprime category. But if your score is in the 620-660 range, you can at least take pleasure in knowing you’re in the “near-prime” category.

That may sound like the credit card equivalent of winning the Miss Congeniality award, but your near-prime status attracts more credit card offers than you’d get if your score dipped below 620. Now, if you have a credit score below 620, you can probably still find an unsecured credit card. But the average “bad credit” APR is around 24.5 percent. That’s a pretty scary APR, so remember you have other options when it comes to plastic. In fact, there are so many types of plastic these days, it gets downright confusing trying to figure out which card is right for you.

One of the things that adds to this confusion are the Visa and MasterCard logos that adorn our plastic. These logos make every card look like a credit card. Just to clear this up from the start, Visa and MasterCard are payment processing networks. They don’t issue credit cards. So when you see one of their logos, it’s just identifying which payment processing network is being used to process your transaction.

When you have a subprime credit score, you need to make the best choice for your needs. Here’s a rundown on the differences between debit cards, secured credit cards and prepaid debit cards.

[Resource: Where Can I Get My Credit Scores for Free?]

Debit Card

If you have a bank account and you can’t get a credit card, here’s your standby. Debit cards are linked directly to your checking (or savings) account. If your debit card has the Visa or MasterCard logo, you have some choices at the point of purchase. You can use a PIN or sign for your purchase. To sign for your purchase, you’ll press “credit” instead of “debit.”

Okay, this is a bit confusing, right? The money still comes out of your checking account and this is not a purchase on credit. But if you have a chance to sign for the purchase, it runs through the Visa network and you gain the security protections that come with a Visa transaction. However, it still comes directly from your bank account so don’t ever think you’re buying the item on credit.

Pluses: You can’t overspend. And don’t sign up for overdraft protection. Don’t give yourself an easy way to go over your budget and expose yourself to fees.

Minuses: Using a debit card doesn’t improve your credit history. No, not even if you press “credit” instead of “debit” and sign for transactions. It’s still just a debit card and your activity is not reported to the credit bureaus.

[Tool: Quickly assess your risk of identity theft for free]

Secured Credit Cards and Prepaid Debit Cards »

Image: Neil T, via Flickr.com

Secured Credit Card

Choose a card that reports to all three credit bureaus and you’ll have a chance to improve your credit history. With a secured card, you make a deposit in a bank account and this amount becomes your credit limit, less any fees that apply.

You then get a credit card—and, yes, this is a real credit card—and you use it as you would any other credit card. In most cases, there isn’t anything on the card that identifies it as a secured credit card.  In the meantime, your “secured” deposit stays in the account. If you don’t pay your credit card bills, the issuer can take your deposit.

Pluses: Use this card responsibly, and you can rebuild your credit history. Pay your bills on time and pay off your balance every month, and over time your credit score will improve. Also, since this is a credit card, you get consumer and fraud protections.

Minuses: Some of these cards have excessive fees, so you have to choose a card carefully. Read the fine print. Most of these cards do have a purchase APR, so if you don’t pay your balance off every month, you’ll incur interest expense.

[Resource: Tips for Paying Off Credit Card Debt]

Prepaid Debit Card

These cards are often used by consumers who don’t have bank accounts, which appears to be a growing part of the population. An FDIC survey in 2009 showed that nearly 9 million Americans are unbanked, which means these individuals have neither savings nor checking accounts.

You load money onto the account and every time you use your card to pay for a purchase, the amount is deducted from your card’s balance. Sometimes, you’ll see an article that calls these cards “prepaid credit cards.” If the card is prepaid, it’s your own money you’re spending. You’re not buying items on credit. I think some cards are mistakenly called credit cards because of the Visa or MasterCard logo emblazoned on the plastic. But a prepaid Visa or MasterCard is a debit card, not a credit card.

Pluses: If you don’t have a bank account, this is much safer than carrying around cash. The amount you can spend is limited to the amount you load onto the card. You can use the card for online purchases.

Minuses: These cards don’t improve your credit history. The fees can be excessive and they vary by issuer. Read the fine print carefully. Most of these cards offer less purchase and fraud protection than what you get with a credit card.

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