Pros And Cons Of Declaring Bankruptcy For Debt Relief

Bankruptcy is the legal declaration of the debtor that he is not in a position to pay back the creditor. Once a debtor declares that he is bankrupt, the law prohibits the creditors from collecting the debts. It will help the debtor to keep the creditors at bay until he can make some alternate arrangement. In many cases, a major part of his debt is written off and he will have to pay back a small percentage of what he owes. Also by declaring bankruptcy, he can make a fresh beginning. Because of this, the people may feel that declaring bankruptcy is the best form of debt relief. However, it is not so.

? Credit rating of the borrower suffers badly because of this. His future loan applications will be rejected. No loan company gives loan to a bankrupt person. 

? When a debtor declares bankruptcy, the collateral owed to the creditor has to be given. The debtor cannot keep it with himself.  In certain cases, the property of the debtor is used to pay off the creditors also.

? Declaring bankruptcy does not absolve the debtor from the tax burdens, child support and other types of loans. He still will have to make provisions for those financial liabilities that he has to pay.

? In bankruptcy, mortgage or other collateralised loan will no be eliminated. Payments towards them will just be deferred until the issue of bankruptcy is cleared.

? In some countries, people who have declared bankruptcy will find difficult to get a job. Because declaring bankruptcy will raise a question on his character.

That is why declaring bankruptcy as a way of debt relief is not an intelligent move. In fact, it is a very disgraceful action that leaves a permanent black mark on ones credit report and character. Therefore, debtors resort to it as a last attempt to escape the debt trap. If the debtor has some sources to pay off his debt then the best course of action to get him out of the debt trap would be to opt for a suitable debt relief plan. He can make a plan debt relief for himself which would require a lot of self discipline to implement. Else, he can avail the services of a debt relief company that will help in devising a suitable debt relief plan for him based on his financial situation and repayment capability.

Why Government Gives Grants For Debt Relief

When people are debt ridden, their expenditure decreases. This reduces the demand for various things in the economy because people will not have money to spend. Slowly this affects all areas of the economy, with the result that the economy of the state / nation suffers. Therefore it is imperative that the people have enough spending capacity so that the economy prospers.

Debt Relief With Government Grants

Government grants are more easily available than other forms of loans. This is because grants unlike loans do not require collateral or any other form of security. These thousands of dollars got as grants can be used for starting a new business, the proceeds from which can be used to clear off previous debts. 
Grants are also available for clearing off debts incurred due to specific reasons like health care, education, business expenses etc.  For e.g. a debt incurred for health care purposes like hospitalisation, medical bills, etc. can be cleared with the help of government grants. Debts incurred for setting up a business can also be funded using government grants. This makes government grant an ideal debt relief instrument.

Are grants easily available?

Grants are easily available to those people who can prove to the government that they are not in a position to pay off their debts. The social service office elaborately studies the financial position, outstanding debts and repayment capability of the debtor before issuing the grant. This is to ensure that the grant is going to the extremely needy people who have no other means to salvage their debt ridden situation.

Advantages Of Availing Government Grants For Debt Relief

1. A grant is easily available because no collateral is required to be got for it. The debtor just has to prove that he is not in a position to pay off his debts.

2. A grant is an aid from the government. It is not a loan. Hence it need not be paid back. It is both interest-free and non-taxable. It is given with the sole purpose of getting the finances of the debtor back on track, thereby making him debt-free subsequently.

3. With the availability of government grants for debt relief the debtors are saved from declaring bankruptcy.

4. Grants in comparison with other form of debt relief are a better option because they make the debtor debt free instantly. 

Government grants are therefore an ideal debt relief option for those debtors who have no other option but to declare bankruptcy.

Understanding Debt Consolidation

Debt consolidation is the process of consolidating all the outstanding loans into one loan. The debt consolidation company gives a loan for the debt amount so that the debtor can pay off all his creditors. The debtor is therefore left with only one outstanding loan. This will make it easy for him to manage and repay the loan. Another advantage of going for a debt consolidation loan is that such loans are usually designed to help the debtor become debt free. Therefore, they have lesser interest rates and easy repayment period making them a better debt relief option.

Debt Consolidation Loan Options

Various debt consolidation loan options are available to debtor for debt relief like

1. Secured Debt Consolidation Loan: If the debtor has something that he can give as collateral, he can opt for a secured debt consolidation loan. Since he is giving security against the loan the interest rates for these types of loans is very less. The most popular of this type of loan is the home equity loan. The debtor gets the debt consolidation loan against the collateral of his house. He cannot default on payment because he will be risking his house if he does so.

2. Unsecured Debt Consolidation Loan: If the debtor has nothing that he can give as collateral then he can opt for an unsecured debt consolidation loan. The advantage of this loan is that you will have only one creditor to pay off now. The amount repaid each moth goes both towards principal and interest unlike other debts were only the interest or principal is cleared and interest keeps adding on for the outstanding amount each month. However, one disadvantage is that since this loan is unsecured it charges a higher rate of interest compared to secured loan.

3. Credit Card Debt Consolidation: The debtor can exchange all his credit cards for a low interest credit card. He pan pay off all his debts with this card. Interest on this card will be kept very low for a year reducing the debt burden of the debtor. After a year, normal interest is charged. This breather of one year must be utilised properly for becoming debt free.

A debtor whose credit rating is undamaged and has the financial capability of repaying his debts, must always opt for debt consolidation compared to the other debt relief options available to him. This will give him a convenient repayment plan to become debt free without damaging his credit standing in the market.

What Is A Debt Relief Company?

Debt relief companies are those companies that help in successful management of debts to become debt free. When a person approaches the company for its services, he has to give exhaustive information about his debts, repayment capability and financial position. Based on this, the debt relief company does an elaborate study before formulating an appropriate debt management plan. Since every debt management plan is made to order keeping in mind the special requirements of the customer it will go a long way in making him debt free.

How A Debt Relief Company Works?

The aim of the debt relief company is to make the customer debt free by managing his debts properly. For that, the debt relief company can choose one of the following methods.

1) Debt Consolidation

It consolidates all the debts of the debtor into one. Then it issues a loan for that amount and pays off all the debts. Therefore, the debtor has only one loan outstanding. The debt has to manage only one debt now compared to the various outstanding debts he had. He has to make just one payment every month. This makes his job easier. Since the money has to be paid to the debt relief company, the debtor and the company can jointly decide on a repayment schedule depending on the financial situation and repayment capacity of the debtor. 

2) Debt Negotiation

The debt relief company can negotiate with the creditors of the debtor to reschedule the repayment period so that debtor gets more time to repay the loan. They can also negotiate with the creditors for lowering the interest rates or pardoning a part of the principal. This will reduce the debt burden of the debtor. Debt negotiation can achieve better results if done by a professional debt relief company compared to an individual because they have accomplished people trained for negotiation.

3) Debt Management

The debt relief company can also undertake to manage the debts for the debtor. The debtor pays a fixed amount to the debt relief company every month which in turn distributes it amongst the creditors. The debtor is free from the work of planning how much to pay whom. This will help him to become debt free soon.

Debt relief companies are therefore a boon to the debtors caught up in a debt trap due to mismanagement of debts. They take on the tensions of the debtors for a small fee allowing to the debtors to enjoy a stress free journey towards a debt free future.

Why Credit Card Consolidation Is Necessary?

? If the credit card dues are not cleared on the due date, the debtor will have to pay a late payment fee in addition to the high interest on the outstanding amount. This creates and additional debt burden on the debtor.
? When the credit card payment is defaulted, the credit standing of the debtor suffers. He will therefore find it difficult to obtain other financial assistance because of this.
? If the repayment is defaulted regularly, the debtor may lose the benefit of a lower interest rate. The interest rate will increase because credit card debt is a form of unsecured loan. This will increase the debt burden further.
Overcome Debt relief from these difficulties with the help of credit card debt consolidation loan. This will enable you to get lower interest rates and longer repayment period for your debts. That will make repayment easier and consequently reduce the debt burden.

Whom To Approach

Numerous debt relief companies in the market offer debt consolidation services. These companies have skilled staffs that negotiate with each creditor to get a better deal in terms of interest, repayment period and late payment fees until they devise a suitable credit consolidation plan for you. Still if you are not able to pay off the multiple debtors on time, the company can offer you one single debt consolidation loan for lesser interest and longer repayment period. This could be a secured or an unsecured loan. Once a suitable debt relief plan is devised, you can follow that plan, make small monthly payments, and become debt free in few months.

Choosing A Suitable Debt Relief Company ? Points To Be Noted

The debtor must make a thorough study of the policies of the various debt relief companies before he opts for one. Every company has different policies and services charges. The debtor, through careful market study, must ensure that he does not end up with a bigger debt burden by opting for the debt consolidation services of a particular company.

Further, he must shop around for better deals. There are so many debt relief companies in the market offering debt consolidation services that they are ready to negotiate with the debtor to formulate a mutually beneficial deal.

1. Debt Negotiation: Try to negotiate the terms of the credit with the creditor. Once you convince the creditor that you really want to pay back the loan then he will be inclined to negotiate the terms of the credit with you. You can then negotiate for lowering the interest or eliminating the late payment penalty that will reduce your debt amount considerably. You can also negotiate for extending the repayment period so that you will have to pay a lesser amount each month. Creditors are generally willing to oblige because they would want the loan to be cleared.

2. Debt Consolidation: This is an important aspect of debt relief. You can avail the services of a debt consolidation company for this. The company consolidates all you debts and gives a debt consolidation loan for that amount. With this loan, you can pay off all your creditors. Then you will only be left with one loan i.e. the debt consolidation loan. These loans are designed in such a way that the burden of the debtor is not further increased. Else, it defeats the purpose of debt consolidation. Further, repayment is easy because now there is only one creditor.

3. Debt Settlement: If the debtor can make a lump sum payment towards the debt, then debt settlement is the best way to obtain debt relief. The debtor with the help of a debt negotiating company can negotiate with the creditor to accept a lump sum amount the debtor can give and close the loan by writing off the remaining amount. It is advisable to take the services of a debt negotiator because he is trained to negotiate for the least settlement. An individual negotiating by himself may not be able to get the desired results. 

4. Declaring Bankruptcy: This is the last option available to a debtor in no position to repay the debts. This may look lucrative to a borrower because just by declaring bankruptcy the creditors are kept at bay. However, bankruptcy must be resorted to as a last option because the credit standing of the person is completely shaken and it is a permanent black mark on his credit score and character.

These debt relief tips will make any debtor debt free. However, the real challenge is to remain debt free in future and not to get into such a situation again. For this, the debtor has to become more judicious and self disciplined in future.

Credit means that you are using someone else’s money to pay for things. It also means that you are making a promise to repay the money to the person or company that loaned you the money.

Whenever a person applies for a loan, mortgage, a credit card or for any other purpose for which he needs to borrow funds from a lending agency, the agency will check the financial credit-worthiness of the person and based upon its assessment of the financial risk involved in the deal, the agency will decide upon the terms and conditions of granting credit. A positive assessment necessitates a sound financial background and a credit history with no bad remarks.

What is Credit Repair?

‘Credit repair’ is a process in which consumers with unfavorable credit histories attempt to re-establish their credit-worthiness. The process usually involves procuring a credit report from the rating agencies and then taking appropriate steps to address any apparent issues such as errors, omissions, misinformation, misreporting or misinterpretation. A consumer can then formally dispute those errors or issues which unjustly distort their financial healthiness and credit-worthiness. Various laws and regulations designed to ensure legal and fair undertaking of the credit repair process can then be utilized to formally and legally start the credit repair process.

Consumers are entitled to a copy of their credit report legally, if they have been denied a credit card or loan and if the information provided on the report is inaccurate, an investigation relating to true facts is necessary for a credit repair.

Why Repair Credit?

A consumer’s credit record significantly influences his future purchasing power and his eligibility of availing any credit facilities in the future. A good rating, or score, can insure a low interest rate and loans for longer term for various purposes like credit card balances, car or home loans. A poor rating makes a consumer vulnerable to finance companies charging exorbitant interest rates and imposing various unnecessary repayment and loan terms. Considering the stakes and the consequences involved, it is absolutely imperative for consumers to understand the importance of repairing their bad or low credit ratings.

The Safe and Legitimate Way to Repair Credit

Credit repair can only be achieved through financial discipline and hard work. Any easy way out of a poor credit history is undoubtedly tempting, but it may lead to further financial difficulties in the future.

If a poor credit history is due to circumstances beyond a consumer’s control, and they are able to somewhat make amends to their credit records after that time, then a creditor can be requested to upgrade credit rating because of a sense of customer loyalty.

Most creditors don’t trust the customers defaulting on their debts, so it may be very difficult to obtain new credit. But once a person is able to demonstrate continuing income stability and prompt payment patterns, his situation can improve in a period of two to three years. This way, even in the case of bankruptcy, a consumer is likely to be offered charge and credit cards within a year or two if maintaining a steady income.

What is most important is evaluating the financial situation. If one finds that they are unable to make at least the minimum payment on outstanding accounts, a contact should be made with the creditors. Many creditors will appreciate the willingness to pay and are most likely to help set up plans for repayment. Avoid making promises which cannot be kept as a small payment is preferable to a large payment that never arrives. Sometimes a small contact can be enough to reduce payments and forestall more severe measures.

The next step is consulting a credit counseling agency. These organizations are staffed with trained individuals experienced in the credit field. A distinction needs to be made between these and the commercial “credit repair” companies who claim that, for a fee, they will undertake credit repair.

No one can legally remove accurate and timely negative information from a credit report. But the law does allow one to request a reinvestigation of information in their file that may be inaccurate or incomplete. There is no charge for this. Everything a credit repair clinic will do can be done by a consumer themselves at little or no cost.

The most important factor in credit repair is recognizing the legitimate and viable options available, recognizing what the scams are, and differentiating between the two. A poor credit history can make it difficult to obtain additional lines of credit making consumers fall prey to many unethical programs that target consumers with less- than-perfect credit. There are no quick fixes in credit repair. Common sense tells you that a third party doesn’t know your credit history better than you. Through contacting credit bureaus, making your own corrections, consolidating your debts and budgeting, you can improve your own score. You don’t need to pay someone to fix it for you. It’s better to apply that money towards discharging your debt.

Summary

Understanding the basics of credit repair and knowing what exactly is needed in order to rebuild your credit history goes a long way to getting it resolved. However, you must be disciplined, find the right credit repair solution for you and not be tempted to fall back into debt.

Claire Bowes is a successful freelance writer and owner of http://www.uk-secured-loans-centre.co.uk where you will find further advice and information on all aspects of secured loans for debt consolidation, car loans and home

The goal of the credit card companies is not to eliminate fraud, but to “reduce it to manageable levels”[8], such that the total cost of both fraud and fraud prevention is minimized[citation needed]. This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction.

Most internet fraud is done through the use of stolen credit card information which is obtained in many ways, the simplest being copying information from retailers, either online or offline. Despite efforts to improve security for remote purchases using credit cards, systems with security holes are usually the result of poor implementations of card acquisition by merchants. For example, a website that uses SSL to encrypt card numbers from a client may simply email the number from the webserver to someone who manually processes the card details at a card terminal. Naturally, anywhere card details become human-readable before being processed at the acquiring bank, a security risk is created. However, many banks offer systems such as ClearCommerce, where encrypted card details captured on a merchant’s webserver can be sent directly to the payment processor.

Controlled Payment Numbers are another option for protecting one’s credit card number: they are “alias” numbers linked to one’s actual card number, generated as needed, valid for a relatively short time, with a very low limit, and typically only valid with a single merchant.

The Federal Bureau of Investigation and U.S. Postal Inspection Service are responsible for prosecuting criminals who engage in credit card fraud in the United States, but they do not have the resources to pursue all criminals. In general, federal officials only prosecute cases exceeding US $5000 in value. Three improvements to card security have been introduced to the more common credit card networks but none has proven to help reduce credit card fraud so far. First, the on-line verification system used by merchants is being enhanced to require a 4 digit Personal Identification Number (PIN) known only to the card holder. Second, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. The majority of smartcard (IC card) based credit cards comply with the EMV (Europay MasterCard Visa) standard. Third, an additional 3 or 4 digit code is now present on the back of most cards, for use in “card not present” transactions. See CVV2 for more information.

The way credit card owners pay off their balances has a tremendous effect on their credit history. All the information is collected by credit bureaus. The credit information stays on the credit report, depending on the jurisdiction and the situation, for 1, 2, 5, 7 or even 10 years after the debt is repaid.

When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates their consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a Personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a Card not present (CNP) transaction.

Electronic verification systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or Point of Sale (POS) system with a communications link to the merchant’s acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is in the United Kingdom commonly known as Chip and PIN, but is more technically an EMV card.

Other variations of verification systems are used by eCommerce merchants to determine if the user’s account is valid and able to accept the charge. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder.

Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user’s bank accounts.

Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 outstanding balance and pays it in full, there would be no interest charged. If, however, even $1.00 of the total balance remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made that the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid…i.e. when the balance stopped revolving).[1]

The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, either to encourage balance transfers from cards of other issuers, or to encourage more spending on the part of the customer. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching cards, which can be considerable if there is a large outstanding balance (see external links for some on-line services).

Because of intense competition in the credit card industry, credit providers often offer incentives such as frequent flier points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their program.

Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee.

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Grace period

A credit card’s grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 30 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charge(s) incurred depends on the grace period and balance, with most credit cards there is no grace period if there’s any outstanding balance from the previous billing cycle or statement (ie. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

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The merchant’s side
An example of street markets accepting credit cards

For merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on their credit card payment (except for legitimate disputes, which are discussed below, and can result in charge backs to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant’s employees.

For each purchase, the bank charges a commission (discount fee), to the merchant for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium.

In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card’s PIN code for identification, and in that case showing an ID card is not necessary.

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Parties involved
Cardholder: The owner of the card used to make a purchase; the consumer.
Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case.
Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder
Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
Merchant account provider: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, Vital, Concord EFSnet, and VisaNet.[2]
Affinity partner: Some institutions lend their name to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities and charities.

The flow of information and money between these parties ? always through the card associations ? is known as the interchange, and it consists of a few steps.

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Transaction steps
Authorization: When the cardholders pays for the purchase, the merchant performs some risk assessment and may submit the transaction to the acquirer for authorization. The acquirer verifies with the issuer?almost instantly?that the card number and transaction amount are both valid, and informs the merchant on how to proceed. The issuer may provisionally debit the funds from the cardholder’s credit account at this stage.
Batching: After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquiring bank later to receive payment (usually at the end of the day).
Clearing and settlement: The acquiring bank sends the transactions in the batch through the card association, which debits the card-issuing bank for the transaction amount, and credits the acquirer for the transaction amount minus the interchange fee.
Funding: The acquiring bank pays the merchant. The amount the merchant receives is equal to the transaction amount minus the discount rate charged by the acquiring bank to the merchant for the service.

The entire process, from authorization to funding, usually takes about 2-7 business days. However, many merchant card processors offer next-day deposits to customers subject to type of banking account.

In the event of a chargeback (when there’s an error in processing the transaction or the cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

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Secured credit cards

A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1000, he or she will be given credit in the range of $500?$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this as they have noticed that delinquencies were notably reduced when the customer perceives he has something to lose if he doesn’t repay his balance.

The cardholder of a secured credit card is still expected to make regular payments, as he or she would with a regular credit card, but should he or she default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for rebuilding of positive credit history.

Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with an additional debt.

Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.

Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. They are often offered as a means of rebuilding one’s credit. Secured credit cards are available with both Visa and MasterCard logos on them. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards can often be less expensive in total cost than unsecured credit cards, even including the security deposit.

Sometimes a credit card will be secured by the equity in the borrower’s home.[3][4] This is called a home equity line of credit (HELOC).

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Prepaid credit cards

A prepaid credit card is not really a credit card, as no credit is offered by the card issuer: the card-holder spends money which has been “stored” via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand (Visa or MasterCard) and can be used in similar ways. As more consumers require a suitable solution to rebuilding credit, recent changes have allowed some credit card companies to offer pre-paid credit cards to help rebuild credit. They are hard to find and have higher APR fees and higher interest costs.

After purchasing the card, the cardholder loads it with any amount of money and then uses the card to spend the money. Prepaid cards can be issued to minors since there is no credit line involved. The main advantage over secured credit cards is that you are not required to come up with $500 or more to open an account. Also most secured credit cards still charge you interest even though you are not actually “borrowing” any money. With prepaid credit cards you are not charged any interest but you are often charged monthly fees after an arbitrary time period. Many other fees also usually apply to a prepaid card.[5]

Prepaid credit cards are often marketed to teenagers for shopping online without having their parents complete the transaction.

Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the Financial Consumer Agency of Canada describes them as “an expensive way to spend your own money”[6]. The agency publishes a booklet, “Pre-paid cards”[7], which explains the advantages and disadvantages of this type of prepaid card.