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Topics addressed on October 3, 2007:
Prepaid credit cards and credit scores
Can you improve your credit score by buying prepaid credit cards and using them? Are they reported to the credit bureau?
You cannot improve your credit score with prepaid cards because they are not reported to credit reporting companies at this time, but that does not mean they won’t be at some time in the future.
Prepaid cards are in a category that is often referred to as alternative credit. The category also includes things like utility bills, rent payments, cable television bills, and cellular telephone bills. What all of these things have in common is that they are like credit in many ways, but they are not exactly the same as credit accounts.
Because they share many aspects with traditional credit, Experian believes such “credit-like” arrangements will help lenders accurately predict whether or not a person would repay a credit account as agreed. But, there is not yet enough information to verify that belief.
Experian is carefully studying these alternative credit data sources to validate that they would be very useful in predicting credit behavior. If that proves to be true, prepaid credit cards and the other types of service agreements I mentioned may be reported regularly.
That is important because it would help people who are trying to establish credit for the first time, especially young people, new immigrants and minorities.
But, it will take some time to verify what we believe is true, and even more time for businesses to be able to begin reporting the information regularly. There also are laws in some states that make reporting utility payments difficult or illegal, so those issues would have to be addressed through legislative action.
Unfortunately, the solution is not right around the corner, but we are working on it.
Thanks for asking.
- The "Ask Experian" team