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Building your credit score can be tough. Whether you're starting from scratch or working to repair a low credit score, there are certain tools that will help you build a solid credit foundation a lot faster and a lot less painfully than other options.
One of those tools is a credit card. Opening a credit card and using the account responsibly by making purchases and paying your bill every month can be one of the best ways to build your credit. It's also one of the easiest -- especially if you're making purchases you would have already made with your debit card.
That said, actually securing a credit card that builds credit can often be easier said than done. If you have no credit score or a very low or blemished credit score, lenders can be wary of approving you for a credit card account. In some cases, this may lead you to look for other types of credit cards, like prepaid cards, to get the job done. But can you build credit with a prepaid card? Here's what you should know.
No, prepaid credit cards do not help you build credit. That's because prepaid credit cards are not the same as credit cards, and one of the downsides is that you are prepaying money to a card to use -- not borrowing from a lender. Prepaid cards are more like gift cards or debit cards than credit cards. You load money onto a card that you swipe or use online to make payments.
Because you aren't borrowing funds, the prepaid credit card information does not have any information to report, like your payment history or balance, to the credit bureaus. Without that information to report, the card won't affect your credit score positively or negatively.
A prepaid credit card is exactly what it sounds like: it's a card you load money onto, typically from your bank account, via direct deposit, or with cash. When the money that you loaded onto the card has been used, the card will no longer work unless you reload it with more money.
You can use these cards almost anywhere you would use a credit card. Grocery stores, retail stores, websites, bill payments, and other platforms typically accept these types of cards, though it will depend on the type of prepaid credit card you choose and the retailer's policies.
These cards can be useful for budgeting purposes or for people who don't have access to a bank account or debit card, but there are some potential downsides. For example, most prepaid cards have monthly fees that come with the card. Some will also charge you for other things, like loading cash onto the card. If you're considering one of these cards, it's important to do your research and make sure that the card does not come with a ton of fees attached to it.
And, if you're looking for a credit card that builds credit, you may want to opt for a completely different type of card instead -- which may include one of the card types below.
The good news is, though, that while prepaid credit cards won't help to build credit, there are other types of credit cards that will allow you to build your credit score -- and you can typically qualify for them with a low or no credit score. These include:
Secured credit cards are one of the better options for people trying to build credit. These cards work like regular credit cards, but the main difference is that you have to put down a security deposit, which is typically the equivalent of your credit limit. For example, if you put down a $500 deposit on a secured credit card, you will typically have a $500 credit limit.
There is a wide range of options for secured credit cards, and many major card issuers will offer these to customers who don't qualify for a typical credit card. Some will require credit checks, others won't, but these cards are meant to help you build credit, so they do report to the credit bureaus each month -- just like a regular credit card.
A secured credit card can be a great way to build your credit score. With a secured card, you won't need to have good credit or a credit score at all to qualify. You simply apply and pay a refundable deposit to open your account. Your card information will be reported to the credit bureaus each month, and with good habits your credit score will grow.
Just like a regular credit card, you receive a bill each month for what you spent the prior bill cycle, which you will pay to the lender. Your security deposit is simply held in case you default; it's not a replacement for your monthly payments. And in nearly all cases, the secured credit card deposit is refundable after a certain period of time -- or when you close your card -- as long as your account is in good standing. If you default, the credit card issuer keeps your deposit.
The reason that these card issuers require a deposit is that it's risky to lend money to borrowers with no or low credit scores. The security deposit ensures that the lender won't lose out on money if the person defaults.
Store credit cards, or cards that are limited to use in a particular retail store, can also help you build credit -- and in most cases, you won't need to put up a security deposit, even if you have bad credit. These cards are unsecured, meaning the lender gives you a credit card limit based on your credit score and financial picture and you do not have to put any money down in case you default. That said, the limits on these cards are typically a lot lower than you would get with a regular credit card.
The upside is that these cards report to credit bureaus every month, so if you use them responsibly they will help you build credit. There are some downsides, though, including the card's limited use -- you can only use them at certain stores -- and the typically high interest rates.
Another option for building credit is becoming an authorized user on someone else's credit card. If you have a friend or family member with good or great credit who's willing to add you to their credit card account, their on-time payments and responsible credit card use will help you build your credit score.
As an authorized user, you get your own card on their account, the ability to use the credit card as you would any other credit card, and the credit benefits that come with their responsible account use. What you don't get, however, is the legal liability in case they default.
Becoming an authorized user is one of the easiest ways to build credit and obtain a credit card, but you should make sure to understand the whole picture when taking this route -- as should the person who's adding you to their account. If you use the card, you will be responsible for your portion of the bill, so those details need to be solidified before you are added as an authorized user to someone else's account.
A prepaid credit card won't help you build credit, but there are a few other options you have for building credit with a credit card. Being added as an authorized user, opting for a secured credit card, or taking the store card route can help you build credit, as all three options report to the credit bureaus each month. If used responsibly, these types of credit cards will have you on your way to building great credit in no time.
Ready to get started? Here's how to apply for a credit card (and get approved)!
No, prepaid credit cards do not report to the credit bureaus. Unlike regular credit cards, prepaid cards are not reported to any of the three credit bureaus, and you are not responsible for a bill each month. These cards act more like debit cards than credit cards. You purchase the card, add money to the account, and then make payments for your purchases with the card. When the money loaded onto the card has been used, you will need to add more to the account.
Yes, you can get a prepaid credit card with no credit score. There are no credit checks or applications with prepaid credit cards, and these cards are not tied to your credit in any way. You simply load money onto the card and use it as you would a debit card. As such, you won't build credit with a prepaid credit card, but you also do not need a credit score to obtain one.
Secured credit cards are a good credit-building alternative to a prepaid credit card. A secured card requires you to fill out an application, get approved, and pay a deposit on the card in the amount of the credit limit. With good credit habits, the deposit is typically fully refundable, and a secured card will report to the credit bureaus each month to help you build credit. Another option is to be added as an authorized user to an existing credit card account, which will also help you to build credit.
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