A prepaid credit card is a “credit” card in name only. It works similarly to a debit card, with the difference that it does not require the holder to have a bank account linked to it.
- Prepaid credit cards only let you spend your own money, so they can’t help you build up your credit score.
- You may still find prepaid cards useful as an alternative to cash.
- Use a secured credit card to improve your credit score instead of a prepaid option.
Anyone can buy a prepaid credit card and load funds onto it. When you use a prepaid credit card, you can only use the money you have loaded on it. It does not come with a credit limit, and, despite its name, it does not involve credit in any way.
How Prepaid Credit Cards Work
When you buy a prepaid credit card, you buy the privilege to use plastic instead of cash, mimicking the use of a regular credit card.
You can use prepaid credit cards for everything you would otherwise handle with a regular credit or debit card. You can use them for shopping, paying bills, making online purchases, etc. In some cases, prepaid cards may even grant you similar protection against credit card fraud, unauthorized purchases, etc. The Electronic Fund Transfer Act covers most prepaid credit cards, limiting your liability to $50 and protecting your funds.
The limit on your prepaid credit cards is the amount of money you deposit onto them. Every time you make a payment with such a card, you pay with your own money. When you exhaust your balance, the shopping is over.
There is one thing prepaid credit cards do not do, and that is to let you take on debt. Depending on how you look at it, the lack of access to credit may be an advantage or a shortcoming.
Prepaid credit card users will stay out of credit card debt. They will also find it easier to stick to their budget and avoid shopping temptations.
(If you are already in credit card debt, call a ClearOne Certified Debt Specialist at 866-481-1597 and get a free savings estimate.)
Since they do not offer access to credit, prepaid credit cards won’t raise your credit score.
There is a myth about prepaid credit cards helping you build your credit score. We can now debunk that myth for good.
You Can’t Build Your Credit Score Using Prepaid Credit Cards
Regular credit cards let you take on debt, which you can then repay. How you handle credit card debt tells creditors and credit bureaus whether you are or are not creditworthy. How you spend your own money tells them nothing in this regard.
To raise your credit score, you have to use credit and repay it in time to prove that you are a responsible credit user. Whether you do it through a loan, a mortgage, or your credit card makes little difference as long as you use credit.
To improve your credit score, you need to have access to credit.
Paying with a prepaid credit card is the equivalent of using cash without the inconvenience and relative anonymity.
When Using a Prepaid Credit Card Makes Sense
Even though you can’t access credit through a prepaid credit card, such cards do have their uses.
- In many cases, you need a cash alternative, even if you don’t need credit. Prepaid credit cards can be the answer to this problem.
- If you are under 18, you can’t have a credit card in your name. If you can’t become an authorized user on someone else’s credit card, you can turn to a prepaid credit card for all the benefits of cashless payments.
- If you don’t have a checking account, you can’t get a debit card to spend your own money. You don’t need a bank account to use a prepaid credit card.
- If you don’t have a credit history, or your credit score is poor, a prepaid card can grant you all the advantages of a debit card.
- If you are on a strict budget, but you are prone to overspending, a prepaid card sets a hard cap on the amount you can spend.
What You Can Use to Build Your Credit Score Instead of a Prepaid Credit Card
If your focus is on building up your credit score, a prepaid credit card can’t help you. Here are two things you can use instead.
- A secured credit card gives you access to credit. Unlike a regular credit card, a secured one requires a safety deposit as collateral to compensate for your non-existent or poor credit score. Those spreading the myth about prepaid credit cards helping you with credit probably mistake a prepaid card for a secured one.
- You can become an authorized user of someone else’s credit card and thus become the beneficiary of their credit history.
Getting Out of Debt Builds Your Credit Score
If you have been considering getting a prepaid credit card in hopes that it could rehabilitate your credit score, there is one other thing you can do to build your credit card back up over time, namely, getting out of debt.
There are several options for credit card debt relief, and you owe it to yourself to explore them. If credit card debt has impacted your credit score negatively, take steps to eliminate it as soon as possible so you can feel free from debt. Get the ClearOne Advantage guide and find out how.
The information provided is for informational purposes only and is not intended to provide financial advice. COA is not a lender, credit repair or consumer credit counseling company. COA doesn’t provide lending or credit advice. Please consult a certified financial advisor for individual credit and lending advice.