Will Prepaid Credit Cards Help You Build Credit?
SAN JOSE, California, July 20, 2021 / PRNewswire / – On the outside, prepaid credit cards and traditional credit cards share many features. They are typically 3.37 inches long by 2.125 inches high each, are plastic, and may feature a credit card network logo (for example, Visa, MasterCard, American Express, or Discover). Yet despite the fact that prepaid cards and credit cards look alike, the two financial products do not work the same behind the scenes.
You can use a prepaid credit card as a replacement for a traditional credit card in many situations. However, when it comes to creating credit, prepaid credit cards are no substitute for reality. Prepaid credit cards will not appear on your credit report and will not count towards your FICO® scores.
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The difference between prepaid cards and credit cards
In many ways, a prepaid credit card acts like a gift card that you might buy at a retail store. Before you can use a prepaid credit card to make purchases, you need to pre-load it with the money you want to spend. (Note: There are often fees associated with loading or reloading your prepaid card with cash.)
When you make a purchase with a prepaid card, the issuer will deduct the amount you spend from your available balance. Once you have spent all the funds you loaded on the card, you will need to add more money before you can use it again.
A credit card, by comparison, is an extension of credit. When you use a credit card for a purchase, the issuing bank lends you the money to complete the transaction. You will then need to repay these funds at some point in the future, depending on the terms of your credit card contract.
In addition to the differences mentioned above, here are a few other factors that differentiate prepaid cards from credit cards.
- You don’t need to complete an application to open a prepaid credit card.
- A lender will not check your credit report (i.e. conduct a credit check) when you open a prepaid card.
- Prepaid credit card accounts do not show up on your credit report with any of the major credit bureaus.
- Prepaid credit cards are not counted towards your FICO® scores.
Prepaid cards vs secured credit cards
Sometimes people confuse prepaid cards with secured credit cards. The confusion is understandable since both types of cards require an initial deposit before you can use them. Again, there are some key differences between these two types of plastic.
With a secure card, you pay a deposit to the issuing bank when your account is opened. In many cases, the deposit you make is equal to the credit limit the bank gives you. So if you want a secure credit card with a $ 500 limit, you must be prepared to deposit up to $ 500 in exchange.
Once you open a secure card, you can debit up to your account’s credit limit. However, you will need to reimburse the card issuer for your transactions (or at least make the minimum payment due) on or before the due date of your next statement.
If you pay your statement balance in full each month on the due date, you should be able to avoid paying interest charges. But if you move an unpaid balance from one statement period to another, you’ll have to pay interest charges based on the account’s Annual Percentage Rate (APR).
Prepaid cards, on the other hand, don’t require you to reimburse the card issuer for the purchases you make. Remember that you are spending funds that you have already loaded into the account. Once you’ve spent all the money you preloaded, you just add additional funds if you want to reuse the card in the future.
There’s also no point in worrying about a prepaid credit card. Instead, issuers may charge you a fee when you load money into your account, withdraw money from an ATM, and potentially at other times as well.
Finally, one of the most significant differences between prepaid cards and secured cards is credit capacity. A secured credit card has the potential to show up on your credit report and help you establish a credit history (provided the card issuer reports the account to one or more of the major credit bureaus). A prepaid card, as mentioned, does not have this same potential.
In some circumstances, a prepaid credit card may be right for you. Yet if your goal is to build or build or replenish your credit, a prepaid card is not the answer.
If you decide to open a reloadable card for non-credit reasons, be sure to pay attention to the fine print and the fee schedule before choosing your preferred card. You can also compare the features of the cards to help you decide which option is best for you.
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