Prepaid credit cards are advertised as a great option for people who are trying to rebuild their credit, but can prepaid cards or debit cards really affect your credit score?
The answer is no, they can’t. Prepaid credit and debit cards have absolutely no effect on your credit score, because they aren’t credit cards. The money you withdraw is yours, so you’re not paying off a loan.
How Prepaid and Debit Cards Work
A traditional secured credit card offers you a line of credit, against which you can borrow a specified amount of money. Your successful repayment of this loan determines your credit score. A prepaid credit card, however, requires you to make a cash deposit, upon which you can draw as long as funds remain. You can only withdraw from your existing funds, however; you don’t get a line of credit. For this reason, your prepaid credit card payments are not reported to the credit bureaus, which in turn give you your FICO or credit score.
A debit card works in a similar fashion, except that it’s connected to your bank account. Once you’ve put money into an account, be it savings, checking or both, you’re issued a debit card which allows you to withdraw funds from those accounts.
Pros and Cons of Prepaid Cards and Debit Cards
While prepaid and debit cards have no effect on your credit score, they offer many conveniences, as well as a few disadvantages:
PRO: Prepaid and debit cards allow you immediate access to your cash whenever you want, wherever you are in the world, as long as you’re near an ATM or at a retailer that accepts those particular cards.
PRO: Prepaid and debit cards allow you to use your own money and not borrow money, which will keep you from going into debt. If you have problems using too much credit and not being able to pay it off, then a prepaid or debit card is probably a smart idea for you.
PRO/CON: Some prepaid cards advertise that they can help you build credit because you can use them for certain payments (such as utility bills) that get reported to the PRBC, a consumer credit bureau. Unfortunately, these payments are not reported to the three major credit bureaus, Equifax, TransUnion and Experian, which are responsible for assigning you your credit score.
CON: By using a prepaid credit card, you aren’t using any credit, and if you don’t use any credit, your credit score can eventually drop.
CON: Your successful management of a debit or prepaid card will be of no value if you’re applying for a loan or a credit card.
In the end, prepaid credit and debit cards offer convenience, but they can’t help you raise your credit score. If you’re looking to rebuild your credit, here are some cards that can help you. If you need more help building your credit, here are some other tips to help.