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 prepaid debit cards cannot help you build your credit history. 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.
Capital One® Secured Mastercard®
The Capital One® Secured Mastercard® is designed for those looking to rebuild their credit. Capital One reports your payments to each of the 3 major credit agencies. In addition, Capital One gives you free access to your credit score and tools to help you manage and track your progress.
There is a $0 annual fee to own the Capital One® Secured Mastercard®.
Table of Contents:
Prepaid Cards that Build Credit
Let’s start by reviewing the types of credit and debit cards:
Credit Cards: Credit cards like 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.
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.
After you’ve applied for your loan and selected a payment option, you’ll be on the path to building your credit. If you already have a lot of high interest credit card debt hurting your credit score, you can lower your utilization rate by paying it off using a 0% APR balance transfer credit card. This could save you hundreds and increase your credit score, too.
Once you’ve completed your payments, the entire principal is returned to you minus the interest rate.
Related: Self Review
For example, if you take out a $525 loan on repayment terms of 2 years; the interest rate is 13.16%. This means that over the two year period you pay your loan back, you’ll pay back a total of $609; $525 in principal and $84 in interest.
- Initial loan activation fee of $9, $12 or $15
- No repayment penalty. Pay your loan off at any time.
- Four different loan options ($525, $545, $1,000, $1,700)
- All funds are FDIC insured.
Quick Links: Here is one of our favorite cards that can help you build credit:
Related: If you’re looking for an easy way to increase your score, sign up for Experian Boost™. This service is free and can see when you make your monthly payments like your utility bill and cell phone bill on time. When you do, your credit score will get a boost.
Learn More: Read our Experian Boost Review
If you’ve used a prepaid card to build credit, please leave a comment and let us know how it worked out for you.