It can be frustrating if you have little or no credit history, or if you are recovering from past poor financial choices, to be developing your credit. Credit can be necessary in order to qualify for improved loans and cards, but securing such loans and cards may not be easy with a young credit profile.
That’s why a lot of consumers would seek credit card issuers that offer prepaid credit cards for credit building. They sound least complicated: load your own coin, control your expenses, don’t take on a ton of debt, and perhaps get a better credit score while you’re at it. The one big issue: The word might get confused with the term “Prepaid Credit Card“.
If you have a traditional prepaid card, you will not usually be able to build your credit as you’re not actually borrowing any money. Secured credit cards and newer credit-building cards can however, provide a prepaid account experience that also reports eligible account activity to one or more of the credit bureaus. Knowing the difference will help you avoid any fees for the card that isn’t ever going to help your credit history.
Do Prepaid Credit Cards Actually Build Credit?
First, let’s dispel a major misconception: regular prepaid debit cards typically aren’t used to improve your credit.
An ordinary prepaid card allows you to load up to $300 into the account and provides you with a maximum buy limit of $300. You are not borrowing any $300 from a lender. It is your money.
Your day-to-day purchases with a prepaid card aren’t necessarily listed on your credit record as normal credit activity since there is typically no credit account or credit history. Charging meals and services, textbooks, and other items, as well as paying for gas and subscriptions on the card, won’t necessarily build credit history on their own.
Thus, why do folks speak of prepaid credit cards that construct credit?
It’s supposed to feel and operate like a prepaid or debit card but with a credit-building component on the back of it. This could be a secured credit card, a secured charge card or another credit-building product.
The critical thing is not how the card looks, but rather what would be the marketing term used on the website.
Ask instead:
- Does the account involve a form of credit?
- Are the accounts or payments reported to one of the credit bureaus?
- What credit bureaus get the information?
- Are all receipts reported (including those under construction)?
- Are there any fees or deposits needed?
If the company is unable to clearly explain the product’s relationship to reporting to the credit bureaus, don’t expect using the card to help build your credit.
Prepaid Cards vs Secured Credit Cards
Although it can be easy to mistake them for one another when you reach for them in your wallet, prepaid and secured cards are quite different when it comes to finances.
With a prepaid card, the money spent is withdrawn from the account that you top up. Imagine a payment card where you only pay for a balance you maintain.
A secured credit card, on the other hand, is an actual credit card. Instead, typically the refundable security deposit is required as a guarantee of timely payment of your security by the issuer in the event you don’t pay up on your security. Then you use the card and pay a bill, just as with a conventional credit card.
Here’s the simple comparison:
| Feature | Prepaid Card | Secured Credit Card |
| Uses your loaded funds | Yes | No |
| Requires security deposit | Usually no | Usually yes |
| Creates a credit account | No | Yes |
| Monthly bill | Usually no | Yes |
| Can report to credit bureaus | Generally no | Usually |
| Can help establish credit | Generally no | Yes, with responsible use |
| Interest possible | No borrowing interest | Yes |
| Credit check | Usually no | Depends on issuer |
There are also new products which fall somewhere between these categories. Other credit cards are linked to a money account or may even require a sum to be deposited in an account prior to spending. This may cause them to think of them as more of a debit or prepaid card despite having a credit-reporting structure behind the scenes.
That is not sufficient to attract buyers by the words on the card. When it comes to credit building, it’s credit bureau reporting that counts.
How Credit Building Cards Work
There are no magic bullets for boosting your credit score, and using a card is not one of them.
In order to add to your credit history, details about the account must be reported to a credit reporting agency. In the United States, there are three major nationwide credit bureaus: Equifax, Experian, and TransUnion.
Various products are processed in an alternate way.
Secured credit cards: Traditional offering; you make a security deposit and get a credit limit. You buy things, get a statement at the end of the month, and pay off your bill. The issuer typically provides the credit bureaus with information about the account.
Charge or “debit” type credit cards: These are newer financial products that cap your spending at what is found in a backed or associated account. The provider, however, sets up the account in a way that allows activity to be reported that is eligible.
Whatever category you switch to, it’s the good habit that is more significant than the mere possession of the card.
Here are some fundamentals to work on:
- Pay on time. One aspect of consumer credit scoring is payment history. Allowing for automatic payments can decrease the risk of seemingly missing due dates.
- Avoid unnecessary debt. It’s not necessary to have a balance or pay interest to establish a credit score.
- Keep balances manageable. Revolving credit accounts – Using a lot of your credit limit can impact your profile.
- Maintain a good account. Credit building is a long-term process and cannot be achieved after just a couple of purchases.
- Check your credit reports. Ensure the account looks as it should; look for incorrect data.
No legal service can give any guarantee on how much your score will improve upon opening one account. Credit scores rely on the details contained in the overall credit score file as well as the credit score model utilized.
What to Look for Before Choosing a Card
This is where comparison shopping becomes important. A product marketed toward people building credit isn’t automatically a good deal.
Before applying, check the following details.
1. Credit bureau reporting
This is something you should have at the top of your list. Determine if the issuer reports to Equifax, Experian, TransUnion, or all three.
Different products might have different policies, so check with the issuer’s current policies, rather than following an old review or social media recommendation.
2. Monthly and annual fees
The combination of multiple fees can make a seemingly inexpensive card much more expensive.
Watch for:
- Monthly membership fees
- Annual fees
- Account opening fees
- ATM charges
- Cash reload fees
- Late-payment fees
- Foreign transaction fees
For instance, $120 over 12 months if it’s a $10 per month charge. Check out the cost of that credit before enrolling.
3. Security deposit requirements
The classic secured credit cards might require a refundable deposit and security before they’re opened. Be aware of the minimum amount required and when and how you get the money back.
Remember that the deposit generally isn’t your monthly payment. You will still have to pay your credit card bill in the terms of the creditors.
4. Interest rates
Certain new credit-building products may not let you have the traditional revolving balance, and some conventional secured cards could accrue high interest rates on a revolving balance.
Under the terms of the card selected, repaying the purchase amount in full by the due date of the statement may, in general, enable you to save purchase interest, if it is obtainable.
5. Eligibility requirements
Inquire about what is needed for the provider to open up an account (bank account, direct deposit, minimum income, membership, Social Security Number, security deposit, credit check).
It’s good to review these requirements prior to submitting applications to avoid possible surprises.
How to Use a Credit Building Card Responsibly
That’s only the beginning of having the right card! How you use the account every day will make all the difference if it’s going to be a beneficial piece of your credit-building plan.
One easy tip is to deposit one or two known entries onto the credit card (and not add to it for everything).
It can be used for, for instance:
- A streaming subscription
- Your phone bill
- Gas
One thing that you can often see around the house is that expense.
Then, sign up for automatic payments when it makes sense, based on the capabilities of the issuer, and you can maintain a sufficient balance in the payment account.
This will make the card more manageable. To show that you have a positive credit history, you don’t have to be buying 20 things a month or anything!
Don’t forget to check your credit report from time to time, either. Americans have the opportunity to see their reports and verify that accounts and payment data are being reported appropriately.
Most importantly, don’t pay for a thing only to build up credit.
One thing is to charge $50 on gas, and another thing is paying $50 back. Buying something that you do not need by spending an extra $300 without regard to your credit, which you think will accelerate your credit-building process, can cause needless financial stress.
Building your credit doesn’t have to be about spending; it’s about keeping multiple accounts for a long period of time.
Better Alternatives to Traditional Prepaid Cards
An ordinary prepaid card is likely not the strategy you’ll want if you’re attempting to build or rebuild your credit score. Thankfully, there are a number of options that can be considered.
- One of the most traditional secured credit cards is one. You give up an item of value, get a credit limit, and develop a credit history when you allow the issuer to report the account. The CFPB in particular believes that secured cards are suitable for those who do not qualify for a regular card.
- Credit-builder loans are not the same. Generally, borrowers do not get the money immediately and spend it, but repayments for a loan at agreed rates are made in the meantime, until the conditions stipulated are met. For some lenders, payment history may be shared with the credit bureaus.
- Credit-building debit-style products could be the answer for any individual who does not want a traditional credit card. Others link a bank account or use a secured account to help rein in how much money they spend and build credit. Typical debit cards don’t usually help you to build credit, but there are newer credit-building types of debit cards that do, says Experian.
If you are added to somebody’s debit card account, you can sometimes build credit history if you are a sanctioned user, but it is dependent regarding how the credit card provider reports on authorized customers and how the credit card is utilized.
Regardless of your selection, DO NOT base it solely on the words of an ad, “credit building. Check reporting, full charges, repayment policies, consumer safeguards, and demands for accounts first.
Frequently Asked Questions
Can a prepaid Visa or Mastercard build credit?
The typical prepaid Visa or MasterCard isn’t likely to generate credit just from paying with it, since you aren’t borrowing but instead using the money that was already loaded onto the card. It may be different with a separate credit-building product with a Visa or MasterCard network name.
What credit score do I need for a secured card?
Requirements vary. Secured cards are usually targeted to those with bad credit or low credit histories, yet it is not guaranteed you’ll be approved for approval. Please check the eligibility guidelines of the particular issuer prior to filing an application.
How quickly can a credit-building card improve my score?
No fixed time frame or definitive improvement in scores. The results will vary based on your existing credit history, account activity, payment history, balances, and specific credit scoring model.
Do I need to carry a balance to build credit?
No. Payment history does not need to incur a balance and interest. It is more important to pay on time and to be responsible with the account.
Are credit-building cards better than regular prepaid cards?
These are used for different things. Having a prepaid card to help you manage your expenses and make payments on time and in full can come in handy, and a credit account properly reported to the credit bureaus can be more useful if you are simply looking to build a credit history.
Conclusion
When you are looking for credit-building prepaid credit cards, you are likely going to encounter various terminology, but it is quite simple to understand: Topping up money to an everyday prepaid card will not normally generate a credit history. Consider another legitimate type of credit-building product if credit is the end goal, and check for details on how the activity will be reported.
Compare bureau reporting, deposits, interest, fees, and qualifications before applying, and practice good habits, such as spending within your means, making timely payments, and keeping the account active. While the right product can start, continued good financial habits over the years will help you create a better credit report from that account.