Can You Build Credit With a Prepaid Card?

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 with a lot less pain 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 or in cash.

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 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.

Does a prepaid credit card build credit?

No, prepaid credit cards do not help you build credit. That's because prepaid credit cards are not the same as credit cards. Prepaid cards are more like gift cards or debit cards than credit cards. You load money onto a card that you use in store or online to make payments, rather than borrowing from and then repaying a lender.

Because you aren't borrowing funds, the prepaid credit card 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.

How do prepaid credit cards work?

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, online merchants, utility companies, and other platforms typically accept these types of cards, though it depends 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. Some will also charge you for other actions, like loading cash onto the card. If you're considering one of these cards, it's important to do your research and make sure the card does not come with a ton of fees you'll have to pay.

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.

Credit-building alternatives to a prepaid card

The good news is that while prepaid credit cards won't help 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 the following options:

Secured credit cards

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 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 unsecured credit card.

Just like a regular credit card, you receive a bill each month for what you spent during the prior billing cycle, which you will pay to the lender. Your security deposit is simply held in case you default (stop making payments); 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 money if the borrower defaults.

Store credit cards

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. 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 often only use them at certain stores -- and the typically high interest rates.

Authorized user

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.

Final thoughts

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 getting a store card 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)!