Prepaid debit and credit cards can build credit, but not in the same ways as a secured or unsecured credit card does. Since prepaid cards are structured differently, understanding how they work and what benefits they provide helps clarify how they can build a credit score.
Since secured and unsecured credit cards are financial instruments that charge interest on a balance, a line of credit is directly established and recorded through either a bank account or credit card balance. Prepaid cards on the other hand can be used like debit and credit cards, but without a bank account and with different application requirements. These prepaid cards can build credit in the following ways.
• Prepaid cards and payment history
Fair Isaac Corporation, the creator of FICO credit scores claims the scores are based on bill paying, debt levels, credit history and types of debt.(1) Payment history, which accounts for 35 percent of a FICO score, can be improved with any type of payment method including prepaid debit and credit cards. Some prepaid cards even help cardholders build a card history as described in the next point.
• Prepaid card fee payments
A prepaid card that helps build credit are the Eufora prepaid Preferred and Elite Mastercards. Eufora’s creditbuilder program automatically withdraws a monthly payment that goes toward the prepaid card’s annual fee. This payment history is then reported by Eufora to TransUnion and Experian credit bureaus to help build cardholder’s credit.(5)
• Line of credit via prepaid card
A prepaid debit or credit card may also have a line of credit feature that doesn’t require a credit check or good credit. An example of this is the iAdvance Line of Credit on a the AccountNow Prepaid Visa Card.(4) This line of credit feature is described as being auto-paid and reported to credit bureaus by DoughRoller, a detailed money blog that provides a wide range of financial information for deal hunters.(3) This type of account feature is actually a hybrid between a prepaid card and secured credit card that requires no credit check.
• No credit check required
According to www.creditcard.com, the Upside Visa Prepaid Card does not require a credit check and doesn’t require a bank account like credit cards do. This allows persons with bad credit scores to benefit from debit and credit payment systems. Moreover, the Upside Visa Prepaid Card also allows online personal checks and direct deposit making it somewhat similar to an bank account debit card.(2)
• Builds responsible card use
A final way prepaid debit and credit cards help build credit scores is by using the cards in a similar way to credit and debit cards. Since they are prepaid, the card user gets in the habit of working on a cash basis, but still uses the prepaid card as a method of payment. This trains the mind to use cards responsibly and may carry over into use of secured and unsecured credit cards by virtue of habit.
Sources:
1) http://bit.ly/ggXQt (myFico.com)
2) http://bit.ly/qvVSi (creditcard.com)
3) http://bit.ly/3M8MdF (doughroller)
4) http://bit.ly/9koCGb (AccountNow)
5) http://bit.ly/aWfjRm (Eufora card)