At a Glance

Prepaid credit cards offer a unique way to build your credit score. This comprehensive guide will explore how these cards function, their benefits, and whether they are the right choice for you.

In this article, you’ll learn:

 

$16.1 billion

Was the market size of prepaid debit and credit card providers in 2022.

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FinFact

Can a prepaid credit card help you to build credit?

Prepaid credit cards, often misunderstood as traditional credit cards, serve a different purpose. While they don’t extend credit in the conventional sense, they can indirectly help you build credit.

A prepaid credit card requires you to load money onto the card before using it, essentially functioning as a debit card. However, some prepaid card issuers report your payment history to credit bureaus, which can positively impact your credit score over time.

How does a prepaid credit card work?

Prepaid credit cards allow you to load a specific amount of money onto the card. This loaded amount becomes your spending limit. You can use the card for purchases until the balance is depleted. Once the balance is exhausted, you must reload it with more funds.

Unlike traditional credit cards, no borrowing is involved, and you won’t be charged interest because you’re using your own money.

How can a prepaid card build your credit score?

Certain prepaid card issuers report your payment history to credit bureaus. Timely payments can demonstrate responsible financial behavior and improve your credit score. However, not all prepaid cards report to credit bureaus, so it’s essential to choose one that does if you aim to build credit.

Who should get a prepaid credit card?

1. If you want the flexibility of using a credit card

Prepaid credit cards offer the convenience of card payments without the risk of accumulating debt. They are suitable for those who want to control their spending while enjoying the benefits of card transactions.

2. If you have a poor credit score

Individuals with a low credit score who may not qualify for traditional credit cards can use prepaid cards to rebuild their credit. It’s a safe and accessible way to prove creditworthiness.

When should you use a prepaid credit card?

1. When you don’t have a bank account: Prepaid credit cards are available to individuals who may not have a bank account. They provide a secure and convenient payment method.

2. As an alternative to cash: Using a prepaid card instead of cash can make everyday transactions more secure and convenient.

3. When you can’t qualify for other credit cards: Prepaid cards have minimal eligibility requirements, making them accessible to those who may not be eligible for traditional credit cards.

4. When you need fraud protection: Prepaid cards often come with built-in fraud protection features, making them a safer option for online and in-person purchases.

5. To manage your budget: Prepaid cards help you stick to a budget since you can only spend the loaded amount. This can be especially helpful for individuals looking to improve their financial discipline.

6. When you are under 18: Prepaid cards are available to individuals under 18, making them a valuable tool for teaching financial responsibility to teenagers.

Other alternatives to build credit

1. Store credit cards

Store credit cards, offered by specific retailers, can be easier to qualify for and may help build credit when used responsibly.

Compare: Best Store Credit Cards

2. Become an authorized user

Being added as an authorized user on someone else’s credit card can positively impact your credit history if the primary cardholder has good credit habits.

3. Apply for a credit builder loan

Credit builder loans are specifically designed to help individuals establish or rebuild their credit history by making small, manageable payments.

Compare: Personal Loans to Build Credit

4. Secured credit card

A secured credit card is another option for building credit. It requires a security deposit and functions similarly to a traditional credit card. Learn more about secured credit cards here.

Prepaid credit card vs. secured card

While both prepaid credit cards and secured credit cards can help you build credit, they operate differently. Prepaid cards use your own money, whereas secured cards require a security deposit that serves as your credit limit. Secured cards are more similar to traditional credit cards and can significantly impact your credit score.

FAQs

The suitability of a prepaid card depends on your financial goals and circumstances. If you want to build credit without the risk of debt, a prepaid card may be a good choice.

A prepaid card won’t hurt your credit, but its impact on your credit score depends on whether the issuer reports your payment history to credit bureaus.

Not all prepaid card issuers report to credit bureaus. Before getting one, check if it reports payment history, as this is crucial for building credit.

The main risks of using a prepaid card include fees, lack of credit-building impact, and the possibility of losing your card and the funds loaded onto it.

Prepaid cards are worth considering if you prioritize financial control and building credit over traditional credit card benefits.

Secured credit cards and credit builder loans typically have a more significant impact on your credit score than prepaid cards.

While prepaid cards are similar to credit cards, they are fundamentally different. Prepaid cards use your money, while credit cards extend credit. Thus, they aren’t considered traditional credit cards but can serve a similar purpose in some situations.