Key takeaways
- Prepaid cards offer a convenient and secure alternative to cash without requiring a credit check or bank account.
- Prepaid credit cards won’t help you build credit, as they don’t involve borrowing or reporting to credit bureaus.
- Secured credit cards or becoming an authorized user on someone else’s card are more effective for improving your credit score.
A prepaid credit card looks like a regular credit card. You can use it just about anywhere – shop online, pay bills, and even withdraw cash from an ATM. They offer fraud protection and can help limit spending, something cash doesn’t do. The best part may be that you don’t need a credit check to get one. A huge perk if your credit score is too low for a traditional credit card.
Prepaid cards offer a lot of perks, but do they help you build credit? Here’s what you should know.
Will a prepaid credit card build credit?
Regular credit cards involve borrowing money from the card issuer. You make purchases on credit and then have to pay for them at the end of the billing cycle. You can either make the minimum payment or pay your balance in full – experts highly recommend paying in full. Your card issuer will report your payment history and amount spent to the three major credit bureaus: Experian, Equifax, and TransUnion. This reporting is what affects your score.
A prepaid credit card will not help you build credit as they do not involve borrowing. To use a prepaid card, you have to load your own money onto it. There’s no borrowing, no debt, no interest charges, and no bills to pay each month. Since you’re not borrowing money, the card issuer has nothing to report to the credit bureaus. As there’s no credit reporting, the prepaid card will not impact your score.
How do prepaid cards work?
Prepaid cards work similarly to debit cards or gift cards. They are easy to get and don’t require a credit check. You load money onto the card either from your bank account or through cash deposits. Then, use the card wherever you like. Grocery stores, retailers, online shops, utility companies, and more all accept prepaid cards. They are basically gift cards that can be used anywhere.
When it comes to a prepaid vs. debit card, the big difference lies in the fact that debit cards are linked to checking accounts. When you use your debit card, you are taking funds directly from your bank account. Prepaid debit cards do not require a bank account and can be obtained from banks or other financial service companies. Once you have the card, you load as much money onto it as you like.
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What are the advantages of a prepaid card?
While prepaid cards won’t build your credit, they offer several benefits that can make them the right choice, depending on your financial situation.
You don’t need a bank account
To get a debit card or be eligible for most credit cards, you must have an active bank account. One of the most significant benefits of prepaid cards is that they don’t require this. If you have a poor banking history and can’t open an account or want to avoid traditional banks, prepaid cards are still an option.
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Carrying cash can be inconvenient and risky. Not to mention, a lot of businesses are turning away from cash and requiring electronic payments. If you don’t have a debit or credit card this leaves you in a tough position.
Prepaid cards offer a secure solution. You can use them anywhere their payment method is accepted – Visa, Mastercard, or American Express. They provide a safer and easier way to make purchases without needing physical currency.
They also can be an easy gift if you don’t want to give cash and are not sure what gift card to select.
You’re under 18
You have to be 18 to qualify for a credit card. Typically, you have to be over 18 to open a bank account, though some banks offer special teen accounts or custodial accounts for minors. Prepaid cards can be a good way to learn how to handle money before you can get a credit or debit card of your own. Parents can load funds onto the card, set limits, and help their children learn essential budgeting skills.
You can’t qualify for a traditional credit card
Traditional credit cards require a hard inquiry. If you have a poor score or a limited credit history, it can be tough to qualify. Prepaid cards offer a viable alternative. You don’t need a credit check to get one, and you can start using them right away.
You want fraud protection
Unlike cash, prepaid cards offer protection from fraudulent purchases. You must register your card when you get it and report it as lost or stolen before submitting a claim. Typically, you are only liable for up to $50 of unauthorized purchases as long as you report issues within two days.
While debit cards also offer protection, the thief can potentially access your entire checking account.
You need help budgeting
With a prepaid card, you can only spend what’s on the card. If you tend to overspend, this feature can help restrain you. And since you’re not borrowing money, you won’t rack up debt with impulse purchases.
You don’t have to worry about missing a bill
Credit cards can be convenient, but you have to make payments every month. With a prepaid card, you don’t have to worry about extra bills. You can take advantage of plastic and shopping virtually anywhere without worrying about missing payments or interest charges.
What are the downsides of using a prepaid card?
While prepaid cards offer plenty of benefits, they are not perfect. First of all, they will not impact your credit score. You are not borrowing money, so there’s nothing to report to the credit bureaus. If you’re looking to boost your score, consider applying for a secured credit card or becoming an authorized user on someone else’s account.
Many prepaid cards come with fees. Potential fees can include:
- Activation fee
- Monthly maintenance fee
- Transaction fee
- Reloading fee
- Checking balance fee
It’s essential to research issuers and choose a card with minimal fees to maximize its benefits. You can find reloadable prepaid cards with no fees, but they are rarer.
While prepaid cards offer protection against fraud, they do not offer the same level of consumer protection as credit cards. For example, if there is an unauthorized charge on your prepaid card, you may not be able to dispute it as easily as you could with a credit card.
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Are prepaid credit cards safe?
Prepaid credit cards are generally safe to use and are certainly safer than carrying cash. If you lose cash, it is gone forever, whereas many prepaid cards have protections to recover funds if lost or stolen. Since prepaid cards are not linked to a bank account, they reduce the risk of identity theft or financial fraud associated with bank account information.
Fraud is still a possibility. In 2019, the Consumer Financial Protection Bureau issued a ruling offering protections against loss and fraud similar to traditional credit and debit cards. In order to take advantage of these protections, you need to register your card. If your card is lost, stolen, or you notice any suspicious activity, call the customer support number right away.
As long as you report the issue promptly, your liability for unauthorized or mistaken charges is typically limited. If resolving the dispute takes longer than ten business days, card issuers are generally required to return the disputed amount back to your account during the investigation.
Additionally, some prepaid cards include deposit insurance, which protects your funds if the card issuer goes out of business—but only if the card is registered.
Alternatives to prepaid cards for building credit
Prepaid credit cards to build credit don’t exist. The good news is that there are plenty of other ways to build up your score.
Secured credit cards
Secured credit cards are one of the better options for getting started building credit. These cards generally do not require a hard inquiry or have very lenient requirements. They work like regular credit cards but require a security deposit as collateral. The cash deposit serves as your credit limit and minimizes the risk for the issuer. It is 100% refundable when you close your account in good standing.
You use your secured card just as you would a normal credit card. Make purchases and pay your bill every month. The card issuer will report your credit activity to the three major credit bureaus. If you make timely payments and keep your utilization low – how much of your credit limit you use – then your score will improve.
Store credit cards
Store credit cards are another option that is easy to qualify for and they don’t require a security deposit. These cards are offered by specific retailers and can only be used at their stores or sister franchises. They may come with certain discounts, coupons, or other perks related to the issuing merchant.
The catch with store cards is they have lower credit limits and higher interest rates. On the upside, issuers will report your credit activity to the bureaus. Charge a small amount each month, stay below 30% of your limit, and make on-time payments. Gradually, your score will go up. And if you pay your balance in full, you won’t be charged any interest.
Anyone can get approved for credit!
Become an authorized user
If you have a friend or family member with a good credit score you can ask to be added as an authorized user on their account. This way, their on-time payments, and responsible credit card use will help build your score. Also, you can use the card without being legally responsible if they default.
Being an authorized user is one of the easiest ways to build credit and access a card. You don’t have to apply for your own account, nor do you even have to use the card. If you do use the card, you will be responsible for a portion of the bill and need to figure that out beforehand.
Frequently asked questions
1. What is a prepaid card?
It is a payment card that allows you to spend only the amount of money you’ve preloaded onto it. Prepaid cards can be used similarly to debit cards for everyday purchases. They are popular for budgeting, gift-giving, or providing an alternative payment option for people without a bank account.
2. Can you get a prepaid credit card without a credit check?
Yes, you can obtain a prepaid card without a credit check. Unlike traditional credit cards, prepaid cards do not involve borrowing money. Therefore, they do not require a hard inquiry for approval.
3. What is the fastest way to build credit?
The fastest way to improve your score is to use a credit card responsibly. Pay your bill on time each month and keep your utilization below 30% of your limit. Secured credit cards, store cards, and becoming an authorized user are effective strategies for building credit quickly.
4. Are prepaid cards a good choice?
Prepaid cards can be a good choice for individuals seeking a simple, convenient payment method without needing a credit check or bank account. They can help reduce spending and are more secure than cash. Consider your financial needs when deciding if a prepaid card is right for you.
Bottom line
While prepaid cards won’t help you build credit, they do have several advantages over cash. These cards can be particularly useful if you don’t have a bank account, want to limit your spending, or can’t qualify for a traditional credit card.
If your primary goal is to improve your score, consider applying for a secured credit card or becoming an authorized user on a friend or family member’s card. Use your card responsibly – pay bills on time and don’t overspend.- and your score will improve over time. Once you’ve gotten your score up, you can apply for the credit card you’ve been eyeing.
