Prepaid Credit Cards
It is easy to confuse prepaid credit cards with secured credit cards. What you need to know is that unlike secured cards, prepaid credit cards aren’t really “credit cards” at all.
Prepaid cards work like bank debit cards. You can load them with a deposit and then use the card for purchases. If you’re trying to rebuild your credit, then it’s important to know how they can help you get other accounts that report to credit bureaus.
If your credit record is damaged, building an alternative credit history with prepaid credit cards may be a good solution for you.
Some people have no credit record. For many of us, this is hard to imagine. But there are folks from countries where credit tracking is uncommon, and there are consumers who simply don’t trust our banking system so they have never applied for any credit. They glide through their daily lives paying with cash.
When they decide to make a major purchase such as a car or a home it becomes a problem. And this is usually when a bank loan officer or credit expert becomes involved in helping them.
The sure way to rebuild credit is with secured accounts, not prepaid credit cards. This is what we advise people rehabilitating their credit. However, prepaid credit cards offer several benefits. Some prepaid cards report to PRBC, an alternative reporting agency. This can help you begin to build your credit profile.
Why Get A Prepaid Credit Card?
Prepaid credit cards look like regular cards. They’re the same size and shape. And most of them carry the Visa and MasterCard logo. This means you can use prepaid credit cards without anyone knowing the difference. You can make purchases on the internet or over the phone with them.
You can set reservations for car rentals, airlines, hotels and restaurants. It offers other conveniences allowed by credit cards. The difference between them and credit accounts is that they don’t allow you to make purchases on credit. The cards must be “loaded” with a deposit of money before they can be used.
This is why they’re better described as prepaid debit cards rather than as credit accounts. Deposits to them can be done on their sponsor’s websites or at ATMs. Once the card is loaded it can be used to transfer money to PayPal or bank accounts.
Applying for a prepaid card doesn’t involve checking your credit so they’re easy to get. They require formal identification, a social security number, telephone number and address. Most of them charge fees for keeping them active. The fees may depend on how you use the card. There is usually an initial fee too.
Advantages of Prepaid Cards:
- No credit history requirements
- Paychecks can be automatically deposited
- Prepaid cards can be purchased at stores or on the internet
- Accepted worldwide, transactions from ATMs anywhere
- Reported to PRBC, establishing your credit history
- Use prepaid cards wherever Visa and MasterCard are accepted
Reporting to PRBC can help consumers with bad credit. PRBC is a consumer reporting agency that helps you build an alternative credit profile. Prepaid credit cards facilitate paying utility bills and rental payments. If you’ve had credit problems, these types of accounts may help you re-establish a credit profile.
People with a history of bounced checks like prepaid cards because it’s difficult for them to open a bank account. Banks and credit unions use a service named ChexSystems to screen people for savings and checking accounts. If someone is listed in ChexSystems, using a prepaid credit card facilitates banking without having a bank account.
Disadvantages of Prepaid Credit Accounts:
- Has no direct influence on your FICO score
- Does not report to the three major credit bureaus
- Recurring charges for loading prepaid cards can be expensive
- Spending is limited to the amount of money you have loaded on it
If you want to quickly improve your credit score, prepaid debit cards aren’t very useful. Unlike typical secured credit cards, these cards do not extend credit so they don’t report to the major credit bureaus. And if they aren’t reported to Experian, Equifax and TransUnion then they don’t affect your FICO score. You’re right to ask what’s the point of using them to try and establish a credit record.
Assuming your ultimate goal is to rehabilitate your credit profile by establishing a good reported history, then you should explore all options. If your primary obstacle to getting a secured credit card is the deposit required to open the account, then you may want to learn more about how to obtain an unsecured credit card for people with bad credit.
If this fails to be approved and you still cannot pledge the cash required as deposit for a secured account, then prepaid cards are a stepping stone, although a small one, in the right direction. Remember, although you can’t directly boost your regular FICO score with a prepaid credit card, people are using them to enroll in the PRBC. It reports payments for utility bills, rent, and insurance payments.
Prepaid cards can make automatic payments for bills. They allow automatic deposits of government and payroll checks. Recently the PRBC has joined with the FICO company to develop an “extended FICO” scoring system. This is accepted by many lenders as an alternative credit profile for consumers with low credit scores.
Comparing prepaid credit cards can help you decide if getting one is worth your time and money.