Do Prepaid Cards Build Credit?
Key points about: how cards that build credit differ from prepaid cards
Credit bureaus don’t receive information from prepaid card transactions, so you can’t use a prepaid card to build credit history.
If you want to begin building your credit history, consider applying for a secured credit card instead of using a prepaid card.
Prepaid cards have several practical applications as alternatives to cash, credit, or debit cards.
You can withdraw money from an ATM, buy an outfit online, pay a bill, or cover lunch with a prepaid card. However, those transactions won’t help build credit history because prepaid cards don’t extend credit
Unlike prepaid cards, credit cards allow users to borrow from a fixed amount of available credit, which must be repaid by the due date. Your credit history demonstrates how you manage and repay debt, including your credit card and other loans. Prepaid cards aren’t loans, so they don’t contribute to your credit. While they can be helpful tools, you can’t use prepaid cards to build credit history.
What is a prepaid card?
A prepaid card, sometimes called a prepaid debit card, is a type of payment card that you load with your intended value as you purchase it according to Consumer.gov. Retailers like grocery stores, malls, and drug stores often sell prepaid cards for a fee. That means you pay for the total value that’s on the card, plus an additional charge. Prepaid cards aren’t connected to your bank or credit accounts. Once you exhaust a card’s funds, you can no longer use it until you reload it with cash or via a direct deposit online.
With credit cards, you can build your credit history as you make purchases and payments through your credit account. Instead of borrowing from a bank or creditor, you can only use prepaid cards to access the funds you’ve already put on them.
How does a prepaid card work?
Prepaid cards function similarly to gift cards, in that they contain a fixed amount of cash you can’t exceed unless you replenish it. On the other hand, prepaid cards can only allow you to access the money you’ve deposited to them directly. According to Consumer.gov, they tend to charge fees for transactions, balance inquiries, and general account maintenance, so you may end up chipping away at the balance more quickly than you expect. You can use a prepaid card almost anywhere you can use a debit or credit card, including ATMs and online stores.
When you use a credit card, you usually have a set credit limit that you can’t exceed. Unlike a prepaid card, however, you repay your credit purchases over time. Credit card companies track your credit card usage. Your credit card company reports your monthly balance and any payments made or missed to the three major credit bureaus, TransUnion, Equifax, and Experian. The credit bureaus use that information to build your credit report, which lenders and other financial institutions use to determine your creditworthiness. Your prepaid card activity, however, isn’t reported to the three credit bureaus.
Can a prepaid card help build credit?
You build credit history when you make a transaction with a credit card, but prepaid cards are not credit cards. If you want to build a credit history, a secured credit card or student credit card may be a better fit. These types of credit cards may not have certain credit history requirements, and using them responsibly may allow you to build a positive credit history and a higher credit score.
Did you know?
If you’re new to credit and want to build your credit history, the Discover it® Secured Credit Card helps you build your credit history.1 Like prepaid cards, using secured credit cards begins with a deposit. From there, however, the two tools work very differently. For a secured card, the credit limit (the maximum amount you can borrow), is determined by the issuer, and then you pay the deposit to begin using the card. Your history with the secured card is then reported to the credit bureaus. If you make timely payments for a time specified by your credit card issuer, you may receive the deposit back upon converting to an unsecured credit card.
When are prepaid cards the best option?
While prepaid cards don’t build your credit history, they may be helpful in certain situations.
You need help limiting your spending
A prepaid card can help you manage your personal budget. If you would need extra support in limiting your spending, you may want to prepay your card with an amount designated for a particular spending category, like eating at restaurants, and not spending more in that category once you use up the designated amount.
You don’t qualify for a regular credit card
You may not meet the requirements for a credit card. For example, applicants must be at least 18 years old with a regular source of income. Each credit card issuer may have other requirements.
You want an alternative to cash
Prepaid cards provide a convenient alternative to cash. You may want to give someone a gift that isn’t cash, but you don’t know what store they’d like to shop in. Plus, not all merchants accept cash. Some stores have moved toward a “cash-free” model, and online purchases typically require a card. In this case, using a prepaid card may be more convenient than cash if you don’t qualify or get approved for any credit cards.
While prepaid cards may be a convenient alternative to cash if you can’t access credit, using a prepaid card doesn’t build credit history. Many financial tools and significant purchases require a credit history. You often need a credit history to take out a home mortgage or finance a new car. Everyone has to start somewhere, though. Secured credit cards or student credit cards could help you start your credit history and equip you for future financial choices.
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