Will a prepaid credit card build my credit score? | Refresh Financial

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Will a prepaid credit card build my credit score?

prepaid credit cards

This is a commonly asked question from people looking to build their credit score. Will a prepaid credit card build my credit score?

The short answer is no. A prepaid credit card does not have any impact on your credit score simply because they do not report to the credit bureaus.

Prepaid credit cards are essentially a substitute for cash – they are like debit cards. You purchase one and load it with your own money through direct deposit from your bank account or with cash. As you make purchases using the prepaid card, your available balance goes down. To increase the balance, you must reload the card with more funds. There is nothing to pay-off, no monthly statements, no interest payments – but no impact on your credit score. Be aware that you may incur fees. The fees for prepaid cards vary depending on the card and can include monthly use fees, transaction fees and cash reloading fees, but they can be relatively low, depending on the card.

Who is a prepaid credit card suitable for?

  • People with a poor credit score – if your credit score is very low, you will find it difficult to qualify for unsecured credit products. Prepaid cards are a good option as anyone can get one, there is no credit check involved. Prepaid credit cards are safer than carrying cash, and some even offer fraud protection if your card is lost or stolen. However, remember, they will not help to increase your credit score.
  • People wanting the flexibility of a credit card, but without the risk of debt – for some people, there is too much risk of debt associated with regular credit cards. Prepaid cards are a safe, convenient way to manage money for those that want to avoid credit but, once again, there is no benefit to your credit score.

Alternative options

  • You may be able to qualify for a store credit card (e.g. 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. However, store cards are still regular credit cards, and it’s not a good option if you will be too tempted by the credit available to you and overspend.
  • Consider a secured credit card. Like a prepaid credit card, you spend your own money, however secured cards do report to the credit bureaus, so with good financial habits, you can work to build your credit score! Unlike prepaid credit cards, secured credit cards are considered a revolving account because you can carry a balance from month to month. Revolving credit card accounts are great indicators to lenders of whether or not you are a credit risk because they allow you to make choices about how much to charge and how much to repay each month.
  • A credit builder loan is a safer alternative all round if building your credit score is a top priority. With this type of loan, you make the payments first, and once you’ve completed your payments, the entire principal is returned to you minus the interest rate. It builds your credit score and helps you save money at the same time!

At the end of the day, prepaid cards are easy to obtain and offer the convenience of making purchases without carrying cash, and in some cases come with added fraud protection. However, they won't help increase your credit score, so think about other options if building your credit score is a top priority!

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