Credit Repair Myth: Prepaid Cards Improve Your Credit Score
Posted on November 22, 2010
One of the hardest parts of credit repair is getting new credit that can be used to rebuild your credit score. If you’ve come across prepaid cards in your quest for new credit, you’ve probably seen the advertisements that these cards improve your credit score. Unfortunately, that’s only remotely true.
The truth is that prepaid cards don’t help your credit score – at least not the credit score that most banks rely on to approve your credit cards and loans. It won’t help the credit score that keeps you from paying security deposits or the one that insurance companies use to price your insurance.
Prepaid cards are like reloadable gift cards. No credit check is required to get a prepaid card, so you’re very likely to be approved for the card as long as you have a deposit and can pay any activation fee.
There’s no credit check required to get a prepaid card because this isn’t a credit card. Credit cards are a way to access a credit limit that’s been loaned to you by the bank. Generally, there’s no deposit required to get a credit card, with the exception of secured credit cards, some of which do help build your credit. Even with secured credit cards, you get a credit limit. The security deposit you make is held as collateral in case you don’t pay back what you’ve borrowed.
Prepaid cards differ because you don’t get a credit limit. The only money you can access on a prepaid card is the money that you deposit onto the card. Since you’re not borrowing money and making monthly payments toward the balance, the prepaid card has nothing to report to the major credit bureaus – Equifax, Experian, and TransUnion. Without an account on your credit reports, there’s no way the prepaid card can help those credit scores.
Some prepaid cards report to PRBC, an alternative credit reporting agency whose name stands for Payment Reporting Builds Credit. PRBC gets information from non-traditional sources like landlords and utility companies. If you pay bills with your prepaid card, those payments can be reported on your PRBC credit report.
PRBC worked with FICO, the company who created the FICO score, to come up with an alternative credit score that pulls information from a PRBC credit report. The FICO Expansion Score shows lenders that you’ve been paying your nontraditional bills on time. Some lenders use the FICO Expansion Score together with another, more traditional credit score to help approve applications with new credit, little credit, or bad credit.
The trouble is that PRBC and FICO Expansion scores may not be used by the banks and businesses you apply for credit with. While you may be able to request the lender use a PRBC credit report to evaluate your application, you don’t have this opportunity with many banks and businesses you’ll be working with.
Long story short, prepaid credit cards don’t do much to improve your credit score, at least not the one that matters the most right now. Prepaid cards may be an option when you can’t get a traditional credit card or checking account, but for everyone else a credit or debit card makes the most sense.
- How to Pick a Secured Credit Card for Credit Repair
- Credit Score Increased. Are You Ready for a New Credit Card?
- No Preset Spending Limit – Can Cards Affect Credit Score Negatively?
- How Credit Cards Can Help Your Credit Score Improve
- Restart Old Debt in Exchange for New Credit Card?