Do Prepaid Credit Cards Help Your Credit Score?

Do Prepaid Credit Cards Help Your Credit Score? article image.

A prepaid credit card looks like a regular credit card, but there's one big difference: It won't help your credit score like a regular credit card can.

Regular credit cards allow you to take on debt, and how you repay that debt is an important factor in your credit scores. A prepaid credit card, on the other hand, works more like a debit card you load with money and make purchases with until the money is gone. Since you aren't borrowing any money with a prepaid card, the account isn't reported to the credit bureaus, and won't have any effect on your credit score.

Prepaid Credit Cards Will Not Affect Your Credit Score

Every time you use a regular credit card to make purchases, you borrow money from the card issuer. Then, you can either repay this debt in full before the end of your billing period, or make at least a minimum monthly payment and let the remaining balance carry over (or "revolve") to the following month. If you carry a balance, you'll accrue added costs in the form of interest charges.

Credit card companies typically report your payment activity to one or more of the three major consumer credit bureaus (Experian, TransUnion and Equifax). On-time payments help build a credit history and improve your credit score.

A prepaid card works differently. You put your own money into the prepaid card account, and the amount you spend is limited to the account balance. Once the prepaid balance is exhausted, no more purchases can be made. If the prepaid card is reloadable, you add (or "load") money onto the card as needed. Non-reloadable prepaid credit cards, often sold as gift cards, are no longer usable when the funds are gone.

Your use of prepaid credit cards is not reported to credit bureaus, so they don't affect your credit score.

When Is a Prepaid Credit Card a Good Option?

There are several reasons people choose prepaid credit cards.

  • You don't have a bank account. You need a bank account to get a debit card and most regular credit cards. You can buy a prepaid credit card with cash and get the convenience of a payment card without a bank account.
  • You want an alternative to cash. Prepaid credit cards can be more convenient than carrying cash or for businesses that don't accept cash. If you can't get a credit card or debit card, you can use a prepaid card to make online purchases. A prepaid credit card can be used anywhere the card's payment network, such as Visa, Mastercard or American Express, is accepted.
  • You're under 18. You must be at least 18 to get a credit card in your name. If no one is willing to add you as an authorized user on their credit card, a prepaid credit card could be an alternative.
  • You can't qualify for a regular credit card. Getting a regular credit card requires a credit check; if you have poor credit or no credit history, you may not qualify. There's no credit check for prepaid credit cards; you can get one at drugstores, office supply stores, gas stations, supermarkets and online, and start using it right away.
  • You want fraud protection. Prepaid credit cards offer safeguards similar to what credit cards and debit cards do. Cardholders are only liable for up to $50 if an unauthorized charge is reported within two days of its occurrence, according to federal rules. Some protections only kick in once the card is registered with the issuer. If your card is lost or stolen, the card issuer may transfer your balance to a new card.
  • You want help budgeting. If you tend to overspend, a prepaid credit card can restrain you, because spending is limited to the money in your account.
  • You want to give someone money. Parents sometimes use prepaid credit cards to give children allowances. You can also give a housekeeper or nanny a card they can use to make purchases for your family, like buying groceries.

Are Prepaid Cards Safe to Use?

Prepaid credit cards offer some protections in case of loss or fraud. Once you get your card, register it immediately and write down the number on the back of the card. If the card is lost or stolen or you notice a suspicious withdrawal, call the number right away.

Your responsibility for fraudulent or mistaken charges on a prepaid debit card is limited as long as you report it right away. If investigating the dispute will take more than 10 business days, card issuers are typically required to credit the amount in question back to your account while the problem is resolved.

Some prepaid cards offer deposit insurance, which protects the money in your account if the card issuer goes out of business. You must register your card to get this protection.

To lessen the risk of loss from a prepaid credit card, keep the card in a safe place and limit the amount you load to the account.

Alternatives to Help You Build Credit

If you can't get a regular unsecured credit card but would still like to build credit, here are two alternatives that offer convenient ways to pay with the added benefit of reporting payments to the credit bureaus.

  • Get a secured credit card. Secured credit cards work like regular credit cards, except that you put down a refundable security deposit that serves as collateral and reduces the lender's risk. Your security deposit generally determines the card's credit limit. Choose a card that reports to at least one credit bureau, use it for small purchases, and pay your bill on time to potentially give your credit score a lift.
  • Become an authorized user. If you have a family member with a good credit score, becoming an authorized user on one of their credit cards allows you to benefit from their positive credit history. You'll be authorized to make purchases with the card, but the primary account holder is ultimately responsible for payments. If the card issuer reports authorized user activity to the credit bureaus, the account will appear on your credit report and potentially help improve your credit score.

Is a Prepaid Credit Card Right for You?

Prepaid credit cards offer some advantages over cash but won't help improve your credit score. To build credit, you may want to get a secured credit card or become an authorized user on a family member's card instead. Use these payment methods responsibly to help improve your credit—and sign up for free credit monitoring to track your progress.

How Good Is Your Credit Score?

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