Do you find yourself confused about how the many different types of plastic in your wallet might be impacting your credit scores? If so, you are most certainly not alone. While the different plastic cards you carry around with you may all look alike and may behave similarly (at least on the surface), the ability of these cards to influence your credit scores may actually differ greatly. Do Prepaid Credit Cards Influence Credit Scores? Let’s check out.
Some types of plastic have the potential to influence your credit scores every single month. Other types of plastic may only influence your credit scores under certain circumstances. Finally, one type of plastic will never influence your credit scores in any way. Keep reading to learn more.
The Types of Plastic
Before we continue any further it is important that you be able to identify and differentiate between the different types of plastic which you might have possessed at some point in your life. There are 4 primary types of plastic – the traditional credit card, the retail store credit card, the debit card, and the prepaid debit card.
Traditional Credit Cards
When it comes to traditional credit cards, the accounts typically come in 1 of 2 different varieties – secured credit cards or unsecured credit cards. While the process of opening a secured versus an unsecured credit card is quite different, they will both behave essentially the same on your credit reports once the accounts have been approved and opened.
Both types of traditional credit cards usually have the ability to impact your credit scores quite regularly. Whether your credit card is secured or unsecured, your account activity will generally be reported to all 3 credit bureaus on a monthly basis. This means that if you manage your account well with on time payments and low debt to limit ratios (aka you pay your balances off in full each month), your traditional card account is very likely to help you to build better credit scores. Of course if you fail to manage your account properly (aka you pay late and/or revolve outstanding balances from one month to the next), quite the opposite can be true as well. In short, whether the accounts are a help or a hindrance to your overall credit health entirely depends upon your actions.
Retail Store Credit Cards
As far as your credit reports and scores are concerned, retail store credit cards will typically behave much the same as traditional credit card accounts. In general your balance and payment history on a retail store credit card account will be reported to the credit bureaus every single month. However, the usability of your retail store credit card is most likely very different than that which you will experience with a traditional credit card. Your retail store credit card will most likely only be able to be used at one store or a small number of specific stores unlike traditional credit cards which are widely accepted by both online businesses and brick and mortar retailers.
Additionally, with notoriously high interest rates and low limits retail store cards can be all too easy to over utilize. Since credit scoring models like FICO and Vantage Score both pay a lot of attention to your debt to limit ratios (the relationship between credit card balances and their account limits), if you over utilize a small retail store credit card that action could have a negative impact upon your credit scores. You should be aware of the potential downsides associated with retail store cards before opening this type of account and, if you decide to open one anyway, be sure to use these accounts carefully.
Also Read: Why Credit Cards Are Safer than Debit Cards
Unlike traditional credit cards and retail store credit cards, information about your debit card is not routinely reported to the 3 credit bureaus. Instead, debit cards are tied to your checking account. You do not charge up a balance and then repay that balance (or at least a minimum required payment) by a due date. Rather you are able to use your debit card to spend up to the amount of funds currently available in your checking account. Once those available funds have been exhausted then any further transactions would generally be declined.
The only time a debit card might show up on your credit reports (indirectly) is if you overdraw your checking account and never pay the bank back. In this circumstance the unpaid debt you incurred while using your debit card could possibly show up on your credit reports as a collection account and would likely have a negative impact upon your credit scores.
Also Read: Information Not Found on Your Credit Reports
Prepaid Debit Cards
Finally let’s discuss prepaid debit cards. They behave very differently than the 3 previous types of plastic already discussed above. In truth prepaid debit cards are basically gift cards, albeit gift cards which can be used at a variety of stores and online retailers.
With a prepaid debit card you load money onto the account and then spend the available funds until they have been exhausted. Once the preloaded funds have been spent you will have to reload additional funds onto the card if you wish to use it again for future purchases. Prepaid debit cards are also notorious for having high fees such as activation fees and fees associated with loading and reloading funds onto the account, among a number of others.
There is also a rather stubborn myth in circulation that deceives consumers into believing that prepaid debit cards may be able to serve as a non-traditional way to help build your credit. However, this idea is 100% incorrect. Prepaid debit cards will never show up on your credit reports. As a result they can never be considered in the calculation of your credit scores. If an account is not reported to the credit bureaus then it cannot hurt or help your credit in any way.