In response to an article about free and low cost prepaid cards, a reader asked about building credit with a prepaid credit card: “Is using a Prepaid Credit Card a way to build a credit history for someone who doesn’t have one?”
This is a great question, and underscores how confusing the different types of credit and debit cards can be. The short answer is that some prepaid cards can build your credit history, but most do not. And no prepaid card helps build your FICO® score. We’ll sort through all the different types of credit, debit and prepaid cards, and how each generally can affect your credit score and credit history. But first, let’s take a look at some of the best credit cards (not prepaid) that can help you build credit.
Quick Links: Here are links to cards with credit builder features:
Featured Offer: The Capital One® Secured MasterCard® offers a no annual fee card with credit building features when you use the card responsibly. It offers regular reporting to all 3 major credit reporting agencies.
Get details on this and other secured credit cards here.
Prepaid Cards that Build Credit
Let’s start by reviewing the types of credit and debit cards:
Credit Cards: Credit cards like Discover, Chase, or Citi represent a loan each time you use your card. Because you are borrowing money, your account is reported to the major credit bureaus. As a result, using a credit card will impact your credit score.
Debit Cards: Debit cards are issued by banks and generally are tied to a checking account. While debit cards today look like credit cards, including the Visa or MasterCard brand, they are more akin to writing a check. When you use a debit card, the cost of the transaction is taken out of your checking account. As a result, debit cards do not help you build credit.
Prepaid Cards: Prepaid cards are very similar to debit cards, except that they are not linked to a bank checking account. Instead, you transfer money to the card (via direct deposit, online, at certain stores, etc.) and then can use the card anywhere that accepts Visa or MasterCard. While these cards are sometimes referred to as prepaid credit cards or prepaid debit cards, they are really just prepaid cards. Because you can only spend the money you have already added to the card, prepaid cards do not represent a loan like a credit card. As a result, prepaid cards generally do not help you build your credit.
There are, however, some exceptions.
Prepaid Cards that Help You Improve Your Credit
Some prepaid cards have added features to the account that will enable a cardholder to build a credit history. The approach that each card takes is different, and understanding the differences and costs involved is important.
The credit cards we’ve listed above are the best credit builder options, in our opinion, but a prepaid card like READYdebit prepaid Visa does have credit score features. READYdebit offers cardholders a free Credit ScoreTracker that helps you track and improve your credit score. But this feature does not affect your actual credit score.
It’s important to note that as of April 2015, READYdebit is in the process of updating its credit tracker program. From its website: “We’re excited to let you know that we’re busy upgrading to a new credit monitoring product that will let you see your full credit report as well as your credit score. We’ll send an email to let you know when the upgrade is complete.
Remember, to be eligible for credit monitoring, you need to be loading your card with direct deposit.”
Are Prepaid Cards a Good Way to Build Credit
While you can monitor your credit with some prepaid cards, as noted above, you won’t be affecting your FICO credit score by using a prepaid card. Low cost prepaid cards are a safe, convenient way to manage money for those that want to avoid credit and are unable to qualify for a checking account (usually because of Chexsystems). But don’t count on an increase in your credit score from a prepaid card.
There are other alternatives. For example, you may be able to qualify for a store credit card (e.g., Sears or Home Depot). By making a few purchases each month for items you’d buy anyway and paying off the balance in full each month, you’d build your credit at no cost. Of course, the risk with credit is that you’ll spend more than you should and find yourself in debt at double-digit interest rates. But if you can manage the credit well, you can build a credit history and improve your credit score at no cost.
If you’ve used a prepaid card to build credit, please leave a comment and let us know how it worked out for you.