Will Prepaid Credit Cards Boost Credit Scores?- 6 Key Uses
People with low credit scores prefer Prepaid credit cards. The loan providers or credit lenders use credit scores as the primary factor to approve customers’ loan applications. Some people prefer adding new credits to their accounts to have enough opportunities to build their credits. However, do all the loans and credit cards help them boost their credit scores? Keep reading this article to learn if prepaid credit cards can improve credit scores.
Statistics say that the usage of payment cards worldwide grew by 2 billion from 2019 to 2021. Mastercard debit cards, Visa debit cards, and Union Pay cards are a few of the payment cards by the largest card issuer brands. Payment cards include credit cards, prepaid cards, prepaid debit cards, debit cards, charge cards, ATM cards, fleet cards, and stored-value cards.
What Are Prepaid Credit Cards?
A prepaid credit card is a process of loading money into your card. These cards are not linked to any bank checking accounts. As the name says, users place money in their prepaid credit accounts in advance to spend them in the future. Prepaid credit cards are easier to secure in comparison to other loans and credit cards. This type of credit card does not rely on credit scores and makes it easier for low credit holders to secure prepaid credit cards.
How Does Prepaid Credit Cards Work?
Prepaid credit cards work on the “pay now and spend later” model. The cardholders deposit money in the card through bank accounts or direct cash deposits. Once the card is paid with a certain amount, the users can make payments with this prepaid amount until it depletes from use. Users can repay the amount to the cards and utilize them for future expenditures.
These type of cards helps people in budgeting and lets them have a clear view of their monthly expenditures. By keeping track of the balance amount after everyday purchases, users can limit themselves to spending only on necessities. Prepaid credit card users must learn about the Electronic Fund Transfer Act which ensures consumer protection by protecting people from prepaid card theft using fraud protection guidelines.
Does Prepaid Credit Card Help To Build Credits?
Prepaid cards are not the right option to build credit scores as their activity is not reported to the major credit bureaus.
Loan vendors evaluate customers’ creditworthiness to approve their loan applications. They consider customers’ loan repayment history to ensure if they are capable of handling another new loan. In this case, maintaining good credit scores becomes the foremost requirement to secure a loan.
People with low credit scores have one other option to boost their credit worthiness. On-time payments on the new credit cards help people build a positive credit history. Before that, people must know what sorts of loans will help them boost their credit scores. New additions like secured credit cards or personal loans will mark their record in the major credit bureaus. Conversely, the activity of prepaid credit cards is not reported to the three credit bureaus, so creating and maintaining a prepaid credit will not impact your credit scores by any means.
Prepaid Credit Cards vs Secured Credit Cards
|Prepaid Credit Cards||Secured Credit Cards|
|Pay Now, Buy Later||Buy Now, Pay Later|
|People load money onto the card and use it to pay their bills.||People spend money and pay them back once they reach the limit.|
|People pay the entire amount upfront.||People deposit a small amount of money initially and then pay the monthly bills later|
|The minimum security deposit is equal to the credit limit. Users can use it till their borrowed money reaches the credit limit.||Users can spend until the prepaid amount balance is zero.|
|This credit card is not reported to the credit bureaus.||The activities of secured credit cards will become records for the credit bureaus.|
|Prepaid cards do not impact credit scores.||A secured credit card impacts credit scores.|
|Example: PayPal Prepaid MasterCard and American Express Bluebird.||Example: Capital One Platinum Secured Credit Card.|
When To Choose Prepaid Credit Cards
While a prepaid credit card is not an option to boost credit scores, they have other benefits. Securing a prepaid credit card is better than other credit options, and the points below cover who should choose prepaid credit cards and when to use them.
No Bank Account
As prepaid credit cards do not link to any bank account, it is easier for people with no bank account to use a prepaid credit card. All they need is the direct deposit amount to buy prepaid credit cards.
Alternative To Cash
These cards are the perfect choice for people who do not prefer carrying cash with them, as they can simply load money onto their credit cards and utilize it for credit card bill payments.
Below the Age of 18
People below 18 years, old can not have a credit card on their own. They must rely on somebody to add them to their cards. However, card issuers do furnish prepaid credit cards for minors.
Low Credit Score
If a loan applicant has poor credit, they have a low possibility to get secured cards. Most of the credit types cross-check the payment history for loan approvals. Here is where prepaid credit cards come into the picture as there is no credit check. The credit card company will not look for credit payment history to issue prepaid credit cards.
Prepaid credit cards restrict users from spending on unnecessary stuff. Users who worry about budgets may load a reasonable amount onto the cards, which helps them from spending more than the prepaid limit.
Best Alternatives To Build Credit Scores
Now you must understand the best alternatives to build a good credit score since a prepaid card is not an option.
The simplest way to build a credit score is by becoming an authorized user in other well-performing accounts. People who can not reach a minimum credit score can depend on a friend’s or family member’s account to utilize their good credit score for borrowing money.
Secured Credit Card
Secured credit cards are one of the best alternatives to boost credit scores. Even bad credit scorers have an option of picking secured cards by pledging a minimum security deposit as collateral. Credit card issuers will report this new credit to the three major credit bureaus that help users with a positive credit history to boost credit scores.
Store Credit Cards (Unsecured Credit Cards)
Users of these store credit cards come with limits to some retail stores or markets and do not require a security deposit, hence the alternative name of an unsecured credit card. Every card issuer allows a credit limit concerning their credit score. Store credit card details are put into the record on the three national credit bureaus. Proper monthly payments on interest charges and loan repayments will accelerate credit scores.
Frequently Asked Questions
1.What are Prepaid Credit Cards?
Prepaid credit cards allow cardholders to previously charge their cards with their money and let them spend the prepaid amount for upcoming expenditures. Users can use the card to pay bills until their balance becomes zero. Users can get a prepaid credit card as they don’t require credit scores.
2.Can prepaid credit cards improve credit scores?
Prepaid credit cards have nothing to do with credit scores as they are not dependent on any loan vendors and do not report their activity to the credit bureaus. Adding a new credit and repaying the loans on time will improve the credit scores, but not in the case of prepaid credit cards.
3.What are the drawbacks of prepaid credit cards?
The major drawback is that these will not impact your credit score. One other drawback is that users must make an upfront payment in the first place. People who cannot afford to load money onto the cards without borrowing money from others will find it hard to handle.
A good credit score increases the possibility of approval for a loan or credit card. If you are looking for opportunities to boost your credit scores, you can select new credit cards and build your credit score by the timely settlement of the loans. The credit bureaus, Experian, TransUnion, and Equifax, will not make records of prepaid accounts and thus it will not affect credit scores. It is better to choose new credit cards like secured credit cards, personal loans, or other loans and ensure their proper repayment to grow credit scores. Reach us for a detailed consultation!!