Can Prepaid Cards Build Credit? What to Use Instead

Prepaid cards offer a way to manage spending without incurring debt, but they do not contribute to building a credit history. A strong credit score provides access to favorable lending terms for loans and other financial products.

Understanding Prepaid Cards

A prepaid card operates on a pre-loaded balance, allowing you to spend only the funds you have deposited. These cards are not linked to a traditional bank account like a debit card, nor do they provide a line of credit. You are spending your own funds, not borrowing money. This makes them useful for budgeting and controlling spending, as there is no risk of accumulating debt.

How Credit Scores Are Built

Credit scores assess an individual’s creditworthiness, used by lenders to evaluate risk. These scores are generated using information compiled by major credit bureaus like Experian, Equifax, and TransUnion. Several factors influence a credit score, with payment history being the most significant component (35%). Other factors include amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). Consistently paying bills on time and managing debt responsibly are essential for building a favorable credit score.

Do Prepaid Cards Build Credit?

Prepaid cards do not help in building or improving a credit score. This is because they do not involve borrowing money or extending a line of credit. Since there is no debt to repay and no associated payment activity, card issuers do not report prepaid card usage to the credit bureaus. Without this reporting, transactions made with a prepaid card have no impact on your credit score.

Effective Ways to Build Credit

Several actionable strategies can help establish or improve a credit history:

Secured Credit Card: Using a secured credit card requires a cash deposit that often acts as the credit limit. This deposit reduces risk for the issuer, making these cards accessible for individuals with limited or no credit history. The card issuer reports your payment activity to the credit bureaus, and consistent on-time payments contribute positively to your credit score.

Credit-Builder Loan: A credit-builder loan typically holds the loan amount in a locked savings account or certificate of deposit while you make regular payments. As you make these payments, the lender reports your payment history to the credit bureaus. Once the loan term is complete (typically 6 to 24 months), you receive the saved funds, having simultaneously built a payment history.

Authorized User: Becoming an authorized user on another person’s credit card account can also contribute to credit building. If the primary cardholder manages the account responsibly, this positive activity may appear on the authorized user’s credit report. Confirm that the card issuer reports authorized user activity to the credit bureaus, as not all do.

Responsible Use of Traditional Credit Cards: For those with existing credit, responsible use of traditional credit cards is key. This involves making all payments on time, keeping balances low relative to credit limits (ideally below 30% utilization), and maintaining older accounts to establish a longer credit history.