Credit Score Articles

Prepaid Cards and Your Credit Score

Young woman using her credit card

More than 43 million Americans currently use prepaid cards and the number is expected to grow as merchants, banks and even government programs unveil new prepaid products, according to the Baltimore Sun. While these products may help you discipline spending, avoid paying interest or racking up debt, they do not help to build your credit score.

With a card that is prepaid you load money onto the card via direct deposit, online or in stores. Similar to a debit card, the amount of your spend is deducted from the total amount in the account. Once you have spent the funds on the card, you must load more money onto the product to continue using it. Because you are not running a balance on the card, there is no interest rate associated with the account.

Due to this functionality, prepaid cards are generally considered an alternative to credit; a characterization that distinguishes them as distinctly different from credit cards. Other examples of credit alternatives include utility bills, rent payments, cell phone or cable service agreements.

Since credit scoring models are designed to predict future credit behavior and these types of data are not currently a factor, they do not contribute to your credit score.

If you are looking for a way to build your credit score, consider a secured credit card. Like prepaid cards, the secured credit card starts with an initial deposit to the account. That deposit is then counted towards your account’s credit limit. Unlike prepaid cards, these operate like a credit account where you make minimum monthly payments, so you will see an effect on your credit score.

Understanding which credit products affect your credit score may help you make better credit decisions that correlate with your financial goals. Read the terms and policies of each product closely to understand how it impacts your credit.