April 27th, 2007

If you have poor credit, you might feel as though you’re shut out from the “normal” world. It seems that you can’t get anywhere without a credit card, as hotels, rental cars, and other businesses demand one for identity validation, as well as for payment — even if you intend to pay cash for your purchase.

The truth is, even with poor credit, you can obtain a new credit card. However, as a bad-credit risk you will usually pay very high fees and receive a lower credit limit. What other options do you have? Plenty, but some will cost you — like that secured or unsecured credit card for bad-credit risks. Others, like the new eLayaway plan (#10), are very reasonably priced but you have limits on where you can use them. Some, like a debit card, require checking accounts. Options like prepaid or gift cards only require a purchase of that card to provide you with a cash alternative that can be used online, at a store, or on the phone.

Whatever option you decide to use to make payments without cash, make sure that you read all the fine print involved with it. You have many alternatives, with the ten best listed below.

1. Debit Cards

   A debit card is a plastic card that can provide an alternative to both credit cards and to checks. First, this card represents the balance in your checking account and functions as a replacement for writing a check. So you must maintain a checking account before you can acquire and use a debit card. In fact, some merchants offer the ability for a customer to withdraw cash along with paying for a purchase, but other merchants — specifically online merchants — may not accept a debit card for purchases, let alone for cash withdrawal unless the card displays a MasterCard or Visa logo. In that case, the cards will usually be accepted at any online or on-the-street retailer that accepts credit cards.

   Debit cards include ATM cards, check cards, or a combination of the two. When you use the debit card, the funds are automatically withdrawn from your checking account and a fee may be attached to the use of the card monthly and/or by transaction. Your debit card can be used at ATMs globally as long as the ATM displays one of the same system names or symbols that is on your debit card. When obtaining funds at an ATM in a foreign country, the funds are dispersed in that country’s currency.

   If your debit card is stolen, a thief can wipe out your checking account and you can be held responsible for the loss depending upon the issuer of that card and the protective clauses attached to it. So, be sure to read and understand the protections that your debit card provides for theft. If you overextend your debit card, you could end up with charges for bounced checks, so be sure to add any debit card charges to your balance to rest assured that you won’t exceed the balance in your checking account when you use this card. Finally, a debit card does little to restore bad credit, as it simply represents your checkbook. However, if you continue to overextend your checking account through the abuse of a debit card, this activity will affect your credit standing.

2. Prepaid Cards

   Prepaid cards function just like credit or debit cards except you can’t rack up a negative balance because your purchases are immediately deducted from the card’s balance. You don’t need a checking account to purchase one of these cards and you can usually use them to make online, phone, or in-person purchases, to pay bills, and at ATMs. Some employers now offer prepaid cards as wage payment for an alternative to checks and some government agencies provide prepaid cards for child support, unemployment and other benefits payments. You can also purchase prepaid cards directly from banks and at some stores. If you want to buy a prepaid card through an online vendor, you usually need to use a credit or debit card to complete that purchase.

   Some prepaid cards do come with associated fees and limitations, as well as with some advantages. The major drawback to this card is that some online merchants will not accept many prepaid cards for open-ended accounts, such as the one you might need for eBay’s seller verification process. Additionally, some prepaid cards also deduct a set amount ( up to $50 ) immediately for gas purchases, even if you’ve only purchased $1 worth of gas. You will be refunded in due time, but many card companies don’t warn their clients about these anomalies.

   On the other hand, parents have found that prepaid cards provide a great introduction to credit cards for teens, as teens can learn quickly how even small purchases can add up at the register. Prepaid cards also are much safer than debit cards because anyone who steals that card can spend only the amount that remains on the card. These cards can usually be “topped off” to raise the current balance on the card, but you may need a credit or debit card and/or a checking account for that process. Once again, this type of card will do little to build credit.

3. Gift or Merchant Cards

   Like prepaid cards, gift or merchant cards don’t require checking accounts or a credit check. You can purchase these cards just as you would any other merchandise. The limitation to these cards is that the gift card usually focuses on one merchant, product, or service. For instance, a phone card is good only for phone calls and a card designated for food purchases cannot be used to pay phone bills. These cards can usually be “topped off” to raise the current balance on the card but you may need a credit or debit card and/or a checkingaccount for that process.

   If you decide to give a gift card to someone, you might read what Daniel Gross and Nadyne have to say about this gift. Not everyone appreciates the perceived value contained in these cards and you might learn why these cards could hinder your buying power as well. For instance, gift cards are often handled like credit cards at the register, so if the balance on that card is less than the merchandise price the card may be denied. The Federal Trade Commission (FTC) offers answers [PDF] to problems that you might encounter with these cards. This card will do little toward rebuilding your credit standing.

4. Secured Credit Cards

   A secured credit card represents one option to rebuilding bad credit or building new credit as a no-credit risk. A secured card requires a cash collateral deposit that becomes the credit line for that account. Usually, you deposit anywhere from a few hundred to a few thousand dollars into that account and your line of credit may represent a percentage of that amount - anywhere from fifty to one hundred percent of those funds. These funds “secure” your account so that if you default on your payments, the bank can recoup the cost of your spending with your funds. You may be able to add to the deposit to add more credit and/or sometimes a bank will reward you for a good payment history and add to your credit line over time without requesting additional deposits.

   Watch out for secured credit card fees, as some companies charge so many fees that your funds may be wiped out before you even use the card. Annual fees, charges for opening the account, processing, and usage fees are rife with these cards. Some secured card issuers are sincere about helping you to build or rebuild your credit, however. These cards may represent the only option for no-credit or bad-credit risks to build credit, although some banks may refuse to cater to the latter individual.

   If you encounter problems with a secured credit card company that tries to milk you out of your funds, use the steps provided by the FTC to avoid and resolve your issues.

5. Unsecured Credit Cards

   You may not hear the term “unsecured credit card,” often because this card is, for all intents and purposes, a regular credit card. However, some credit cards are easier for no-credit (such as students) or bad-credit users to access, as they often come with higher interest rates, annual fees, and lower credit limits. But, if you can manage to snag one of these cards and treat it with respect, the bank may raise your limits over time and this will also help you to rebuild or build your credit. However, you will need to contact and work with the bank to lower your interest rates and to eliminate the annual fee once your credit score has improved.

   Beware of credit card issuers that may offer a high line of credit for use at only one store. Another scam includes a card that pretends like it’s an unsecured card but it acts like a secured card in that it wipes out your checking account with fees and charges to open and operate the account.

6. Secured Personal Loans

   Despite bad credit, you might posses a home or other merchandise and funds that can serve as collateral for a secured personal loan. In this case, you can offer this collateral as security against default on that personal loan. For instance, you can borrow money on your automobile for an emergency situation. On the other hand, if you plan to purchase a home or an automobile, you can use that unpaid-for item as collateral on a loan to purchase that item. In that instance, the bank or finance company will hold the deed or title until the loan is repaid.

   Other types of secured loans include home equity loans, home equity lines of credit (HELOC), or even second mortgages. Such loans are based on the amount of home equity or the value of your home minus the amount still owed. Other types of secured loans include debt consolidation loans where a home or personal property is used as collateral or where loans are consolidated without collateral (such as consolidated school loans). Instead of having many perhaps high-interest payments to make each month, money is loaned to pay the original lenders off and the borrower then repays that lender. But, you may still need a cosigner who maintains good credit to help you to obtain this loan.

7. Unsecured Personal Loans

   Like unsecured credit cards, unsecured personal loans are obtained without collateral. A person obtaining an unsecured loan agrees to pay back the loan within a set time frame and signs documents attesting to such. This type of loan can also be called a signature loan. In many cases, a person with little to no or bad credit will need to obtain the signature of a co-signer who maintains good credit to secure the loan. This cosigner may need to offer collateral to meet the terms in the loan (which will then make this loan a secured loan - see above).

   The simplest unsecured loan is a personal loan from a friend or family member, with an I.O.U. as signature of agreement to pay back the loan. Since this type of loan can create ill feelings among friends or family members if the loan remains unpaid, you can look at using a service like Circle Lending to assure friends and family that you’re on the up-and-up.

8. Bill Me Later® Option

   Bill Me Later® is an alternative to credit cards for online and phone purchases. You don’t need to complete an application or get approval prior to shopping, but you do need to use your social security number to apply. Bill Me Later® will also review your credit report when you sign up and again periodically to “provide you with the maximum buying power possible.” Your purchase may be declined if your account is past due, if you attempt to make a purchase larger than the amount of credit they extend to you at any given time, or if a technical error on the merchant site.

   A limited number of merchants accept this form of payment, which works much like a credit card in that you receive a statement that lists your activities and requests payment. But, it appears that merchants are beginning to step up to try out this service, as Bill Me Later® assumes all responsibility for payments (you do not repay the merchants, you repay Bill Me Later®). Some new offers through Bill Me Later® include a “no pay” option for 90 days from U.S. Airways, Continental Airlines, and WalMart.com (the latter for orders over $250). Most of these special offers have expiration dates.

   Current APR on this alternative equals 19.99 percent, and the minimum finance charge is $2.00. However, like a credit card, you can avoid these charges if you pay your bill in full each month. You’re limited with bill payment options, as Bill Me Later® doesn’t accept credit cards, PayPal, or cash payments. But, the bill can be paid with a money order or through your checking or savings account.

9. Web-Based Funding Accounts

   If you need or want to purchase items online without a credit card, you can use services like PayPal and FirePay to accomplish this goal. Both accounts are free to set up for personal purchases, but they require checking accounts or credit or debit cards to both fund the account and to verify your identity. FirePay will charge a fee when you fund from your bank account into your FirePay account. On the other hand, PayPal charges the merchant, or the funds receiver, for the use of the account. When you purchase merchandise online through PayPal, the merchant will feel the pinch, not you. But, when people send money to your PayPal account, you’ll begin to feel that pinch as well. You can, however, fund PayPal or withdraw monies directly into a checking or savings account without charge. If you wish to receive a check from Paypal for the funds in your account, you will be charged a fee. But, PayPal currently offers a 5.04% interes rate based upon a seven day average yield on any funds you leave in this account.

10. Layaway Online

    Some online merchants, like their brick-and-mortar counterparts, offer layaway options where you pay a small deposit and monthly installments until the item is paid for in full. Only then can you take possession of that merchandise. While this payment option provides individuals with a way to purchase merchandise without accruing credit card fees, some merchants like Wal-Mart have dropped their layaway services with claims that the added costs and administrative hassles aren’t worth the effort when a customer can just use a credit card instead. Catch-22, right?

    If you like the layaway option, you can give Florida-based eLayaway a shot. The drawback is that this service was initiated in January 2007, so access to a wide variety of merchants remains narrow and regional (Gulf Coast area), with more offers for gift cards (see #3) than any other option.

    eLayaway requires a name, home address, phone number, date of birth and email address to open an account. The merchandise, once you’ve paid for it, will be sent automatically to the address that you give to verify your account. There are no credit checks and sign up is free, but you will be charged a 1.9% flat transaction fee for every $100 you transact through eLayaway. For instance, if you layaway an item that costs $350, you will make four payments of $89.16 for a total payment of $356.65. This amount reflects the total cost of the merchandise plus $6.65 in taxes and fees. While this is not as cheap as paying cash outright, it’s a definite improvement over fees charged by credit cards, most loans, or by a revolving account with Bill Me Later®.

As with credit cards, the options listed above come with a price and some risk. All online sites and their functions run the risk of downtime where you may not be able to access your account. Additionally, if you don’t own a computer, some options are beyond your capabilities, as some public places may not allow you to access private accounts to do online banking or credit transactions on their computers.

Beyond these limitations, even the consumer who refuses to use credit cards for personal reasons will find more and more options available to purchase online merchandise. The point here, perhaps, is that these options also provide a way for consumers to become more…well, more consumeristic. Once again, be sure to read the fine print and learn about both the charges and the protection that any institution will provide to you as a consumer. Choose the best option available for your needs and then use the credit cards or their alternatives with an eye toward respect for both your credit history and for what that company can take away from you if you cannot pay your bills.

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This entry was posted on Friday, April 27th, 2007 at 10:44 am and is filed under Features.