Credit Building Tips

Does a Prepaid Credit Card Build Your Credit Score?

Amy Gilmore
October 17, 2022

A prepaid credit card might be convenient for paying bills if you do not have a bank account. However:

Note iconPrepaid credit cards do not help to build credit because the issuers do not report to credit bureaus.

If you currently use a prepaid card to manage your finances, some alternatives, like a secured credit card, can help you build credit. Managing credit can be confusing for first-time credit users and individuals who lack a score due to a brief history.

So, we created a guide to help. In it, you will learn how prepaid cards work, what alternatives you can use to establish your credit history, and how to manage accounts that report to credit agencies.

Prepaid Credit Card: Does Not Report to Credit Bureaus

Note iconPrepaid credit cards do not report to credit bureaus. When you are learning how to manage credit, this can be a good thing. However, when trying to build credit, you need your card issuer to report your card usage and payments.

Issuers do not report to the reporting agencies because they are not extending you any credit. You are using your funds the same way you would if you had them deposited into a traditional bank account.

1. How Does a Prepaid Credit Card Work?

Prepaid cards can be beneficial if you do not have a bank account.

  • You load money on the card and then use the card to pay for items.
  • You can use the card to pay for purchases if your balance covers it. You will have to reload your card when you run out of available funds. Typically, prepaid cards do not allow you to overdraft for any amount.

So, if you are short a few dollars, the merchant will decline your transaction. That is because prepaid credit cards are more like debit or check cards. They even allow you to directly deposit funds into the prepaid account using a payroll direct deposit enrollment form. The form lists the routing and account number of your prepaid card and gives payroll companies the information they need to deposit your funds correctly.

2. When Should You Use a Prepaid Card?

Prepaid credit cards are helpful when you do not have a bank account. They are easy to purchase, and you can use them to purchase most things you would use a debit or credit card to buy.

prepaid credit cards from different banks

Then, you can use the card to pay for your purchase when you have enough. It is a convenient way to pay for things. However, it is not like a credit card. Prepaid cards are more like a checking account.

You can think of prepaid cards more like debit cards. You can only spend what you have in the account. Prepaid card issuers do not issue you credit or report any 'credit' activity.

If you do not have a bank account or owe a bank, you can use a prepaid credit card to pay many bills. However, prepaid cards do not allow you to complete some purchases that major credit cards allow.

3. Prepaid Credit Card Restrictions

Prepaid cards have some limitations that typical credit cards do not have.

Some of the purchases you might not be able to make with a prepaid card include:

  • Hotel rooms
  • Car rentals
  • Gas
  • Vacation rentals
  • Recurring memberships

The restrictions may make it challenging to pay for some items as these cards do not work like major credit cards.

What is a Secured Credit Card?

Secured credit cards are similar to prepaid cards in that you pay an initial payment to open the card. Unlike a prepaid card, the initial payment for a secured card is like a security deposit, which is why banks call them secured cards.

With your security deposit, the bank will extend you credit. After the initial security deposit payment, your secured card works just like any other major credit card. There are even cards that offer cash back and travel rewards, and you can use a secured credit card to book rental cars, pay bills, and buy things online.

Each month, the card issuer sends you a bill with the total amount owed on the card and the minimum payment. You must pay at least the minimum payment to keep the account current. If you miss a payment, the card issuer will report the late payment to the credit bureaus.

However, they also report all of your on-time payments, which helps you to build your credit history. Periodically, the bank will review your card history and credit report to determine if you are eligible for credit increases. If your credit history is positive, the issuer may also return your security deposit and transition your card to an unsecured account.

You can get a secured credit card through most banks. Typically they require a payment of around 75 percent of the card limit. The credit limits available depend on the issuer and your credit history. However, there are secured cards with limits as high as $5,000.

Several credit building applications offer a virtual secured credit card. You pay a security deposit, and they issue you a secure credit card that you can use for online and in-store purchases if the merchant has a tap-to-pay card reader.

Virtual secured cards work just like having a physical card. They report to the credit bureaus. You just do not have a physical card.

  • Prepaid cards and secured cards have a lot of the same features. However, prepaid cards do not report to the credit bureaus, and secured cards do.
  • You must make an initial deposit when opening a prepaid or secured card. The difference is that when you open a secured card and use it, you must pay the credit issuer the amount you used on the card.
  • If you do not pay on time on a secured card, the issuer will report a late payment to the bureaus. That is not the case with prepaid cards.

When you deposit money on a prepaid card, you do not have to pay the money back. You load more money when you need to use the card. It does not adversely affect your credit score if you cannot load money on the card for a while.

Tips for Using a Secured Credit Card to Build Credit

When you use a secured credit card, the issuer reports to the credit bureaus. You have to use them like you would any other major credit card.

helpful credit tips

1. Do Not Get a Secured Card Until You Are Financially Stable

It sounds like getting a secured card is a great way to build your credit, and it is, but you first need to make sure that you can pay back purchases. If you are strapped for cash, paying a credit card payment can be challenging.

If you are unfamiliar with using credit and need money, it can be easy to charge something and worry about how to pay it later. However, even a small purchase can negatively impact your credit if you do not have the cash flow to pay it off.

2. Set Aside the Money to Make Monthly Payments

Your method for keeping track of your monthly finances depends on your personal preferences. If you are good at managing things online, you should set up auto-pay.

You can usually make payments through your account application if you get a secured card through your bank. Your credit card balance and due dates will also appear under your list of accounts, making it easy to make payments and manage your credit card balance.

3. Open a Secured Card at Your Bank

You can likely apply for a secured card through your bank if you have a bank account. Setting up a relationship that includes several accounts of different types with a single bank is a good idea. It helps establish a long-term banking relationship and makes it easier to go to your bank for loans even if you do not have a substantial credit history.

Your bank will look at your complete history over time when considering you for loans. Plus, you can speak to your banker about different options for building your credit.

4. Use Your Card for Specific Purposes

Part of learning to build credit is learning good financial habits. If you only use your card to make planned purchases, it is easier to create healthy spending habits. It is easier said than done. However, with diligence, you can learn how to spend responsibly.

5. Treat Your Credit Purchases Like Cash

You should always treat credit purchases the same as cash. If it would put you behind financially to spend your money on a purchase, you should not use credit to buy it.

Many people think that credit cards are there to purchase things you want and pay them off over time, which can be used for that. However, you always want to ensure you have the money to pay off credit card purchases before you spend.

If you make purchases on a secured card that you plan to pay off over time, at the very least, you need to factor the monthly minimum payments into your budget. Then, wait until you pay off the purchase before you make another.

6. Keep Your Credit Balance Low

When you keep a high balance on your credit cards, it reflects poorly on your credit score. It can reduce your credit score by 50 to 100 points. Even if you make your payments on time, having a high card balance will negatively impact your score.

Many people use credit cards to earn travel points or cashback. If you do, pay the card down to below 30 percent of the monthly limit. Otherwise, your credit report will show that you have high credit usage, and your score will go down.

7. Keep a Balance on Your Cards

You need to keep a balance or use your cards regularly if you want the bank to keep them open. Otherwise, the issuer may close your card and return your initial security deposit.

When a bank closes one of your accounts, it can lower your credit score, especially if it is one of your oldest accounts.

8. Get a Secured Card with Low Annual Fees

You will want to keep your secured card open for a long time to build a high credit score. Closing the account will lower your credit score significantly once you have had it open for some time.

So, you want to ensure you do not have to pay an annual fee to keep your account active. Many secured cards offer no annual fee.

9. Do Not Fall Prey to Predatory Cards

Cards issued by central banks are great for building your credit. However, there are many options out there that offer little credit and charge high fees.

Just because you have little or no credit does not mean you should subject yourself to predatory lenders. You pay a deposit when you open a secured card, so you give the bank money before you spend any of yours.

Do not be so eager to build your credit that you give your money to the wrong bank. The best cards are usually the ones issued by central banks.

If you do your banking at a national financial institute, consider applying for a secured card through your bank.

Alternative Ways to Build Your Credit

Getting a secured card is not the only way to build your credit. There are many other ways that you can earn a good credit score.

1, Apply for a Store Card

Store cards can be easier to qualify for if you have no credit. However, store cards can be harder to manage.

You must make sure you pay down the balance on store cards quickly. Most issuers of department store cards do not report your card limit. They convey your high balance.

If you pay the minimum payment of $50 on a $500 purchase for a card with a limit of $5,000, a lender pulling your credit will not know that you have only used ten percent of your card. Instead, you will appear to have a $450 balance on a card with a $500 limit.

2. Have Someone Add You as an Authorized User

Having someone add you as an authorized user to their card can help you build your credit profile. However, you have to be careful about who adds you as an authorized user.

Once added to someone's card, their payment history reflects on your credit profile. The card owner may have other positive accounts to counteract a few late payments, but when you are building your credit, even one or two slow payments will significantly impact your credit score.

Furthermore, you must use the card wisely. Otherwise, it will impact both your (and the card owner's) credit negatively. Do not use the card if you cannot make payments on time. Have your friend or family member hold on to this card.

3. Report Bills You Pay to the Credit Bureaus

Experian allows you to add utility bills, rent payments, cable and internet payments, and even monthly subscription services to your credit report. If you lack an Experian score, taking advantage of this feature could give you a credit score.

To receive credit for paying these bills, you need a national bank account that connects to the Experian site. Once you add your bank account, the Experian Boost app will scan for bills you can add.

You then have the option of choosing the bills you want to report. You can also remove them later. However, removing your bank account or specific bills may negatively impact your score.

If you have been using a prepaid card as an alternative to a bank account for paying monthly bills, you will have to open an account at a central bank before using the Boost feature through Experian.

4. Apply for a Student Credit Card

If you are a student, you can likely get an unsecured credit card. Banks often issue student credit cards to college students. So, this may be a good option if you are going to school. Just be mindful of your spending, as these cards often have higher initial limits.

5. Apply for Store Credit Through Conn's

Conn's accounts are beneficial for building credit. When you buy with Conn's financing, you apply for a specific amount to cover that particular purchase. If you are approved, Conn's will open a retail installment account for you. It is similar to an auto loan. You have terms that you must adhere to that specify the monthly payment amount and date.

You can pay the purchase back and apply for other purchases, but you do not have an open credit card. If you do not qualify for Conn's in-house financing, they may refer you to other lenders who work with borrowers who have not had as much time to build their credit and people trying to rebuild.

6. Buy a Car

Auto loans can help you build credit, and if you have a stable job, they are sometimes easier to get than an unsecured credit card. While you need a mix of accounts to build a strong credit profile, if you take out an auto loan and pay your payments on time each month, it will go a long way toward helping you build positive credit.

Furthermore, auto loans are categorized differently from credit cards in credit models. So, if you want to get approved for a mortgage, auto loans are considered a better indicator of your ability to repay a home loan.

7. Open a Bank Account Instead of Using a Prepaid Credit Card

Opening a bank account will not directly impact your credit profile. However, it will make applying for some types of credit more accessible. It can also help you to add bills you regularly pay to your credit profile through the Experian Boost feature. When opening a bank account, make sure to use a national bank. That way, you will have access to free ATMs across the country, and you can connect your account to Experian Boost.

When you open a bank account, your bank will issue you a debit card which you can use like a prepaid credit card to pay bills and make purchases in stores and online.

Prepaid Credit Card FAQs

Now that you know the difference between prepaid and secured credit cards, let's read the answers to some frequently asked questions. They are highly informative and may help you better understand the limits of prepaid credit cards.

What are the Disadvantages of Having Prepaid Credit Cards?

When you load money onto a prepaid debit card, accessing the funds via an ATM can be challenging. These cards give people without a credit card the ability to make credit card purchases, but they make it more difficult to pay bills at times. Another disadvantage of prepaid credit cards is that they do not report your payment history to the credit bureaus.

Can You Use a Prepaid Card as a Credit Card?

If you set up your prepaid card, you should be able to use it to complete debit and credit card payments. If you want to use it as a debit card, you will enter the pin you selected when you set up your account. If you use the card as credit, you will have to sign for the purchase on a printed receipt or the pin pad.

While you can choose the credit option for in-store purchases, you are not able to make some purchases you would be able to make with a major credit card. For example, many hotels will not let you use a prepaid card to rent a hotel room. You may also be unable to pay for gas at the pump, rent a car, or pay some utilities with a prepaid card.

Should I Pay My Credit Card Off Every Month or Leave a Small Balance?

According to Experian, one of the major credit bureaus, leaving a small balance on your cards does not positively impact your credit. Leaving a small balance can help prevent account closures that can negatively impact your average age of accounts. However, it is best to ensure that your credit payments are on time.

If carrying a balance causes you to miss payments, it is not worth leaving a balance on your cards. Furthermore, if you use your credit cards frequently, the card issuer should not close your account without first notifying you.

Do You Understand the Difference Between Secured and Prepaid Credit Card?

The most important thing to remember about prepaid cards is that they do not help to build your credit score. Instead, if you want to build credit, you can start with a secured card. It works like a traditional credit card, except you must make an initial deposit before the bank opens the account or issues the card.

You can also open a bank account and use your debit card to make everyday purchases. Opening a secured card and bank account at the same bank will make it easy for you to pay your monthly credit card payments on time, which is essential to building a favorable credit profile.


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Written By:
Amy Gilmore

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