Do Prepaid Cards Help Build Credit?

While prepaid cards may be a helpful tool for some people managing their personal finances, they don’t work like traditional credit cards. Prepaid cards are a type of card you load with funds and then use to make transactions, but they won’t help you build credit.

Let’s walk through how prepaid cards work and when it might make sense to use them.

What is a prepaid credit card? 

Prepaid credit cards are reloadable cards that allow you to make purchases with the funds you’ve added to them. While some people may refer to them as prepaid credit cards, they’re not credit cards in the traditional sense, because they don’t involve borrowing funds. They aren’t subject to a credit limit, although they are limited to the funds that you add to them.

Do prepaid cards build credit? 

Prepaid cards don’t build credit for a few reasons. For starters, they aren’t considered credit accounts because you use your own funds to load them, as opposed to borrowing funds from a lender. Since they’re not credit accounts, you don’t get access to a line of credit that comes with a spending limit and monthly payments in the same way that you would with a traditional credit card.

Likewise, since there are no monthly payments that you need to make, your activity on your prepaid card won’t be reported to the major credit bureaus. When you have a traditional credit card, your payment history and the amount you owe is typically recorded and sent to the credit bureaus, who issue credit reports and credit scores.

Why prepaid cards don’t affect your credit score 

Because your prepaid card’s activity isn’t reported to the major credit bureaus, using it won’t affect your credit score. Activity on a traditional credit card, like your history of making on-time payments, credit utilization (or how much available credit you use), the diversity of credit accounts you have open and how long you’ve had your credit accounts open are all typically reported to credit bureaus.

What to consider if you want to build credit 

For some, it might be disappointing that you can’t build credit with your prepaid card. Luckily, there are other alternatives that might be able to help, like:

• Secured credit cards: Secured credit cards require a deposit that acts as your line of credit. Some secured credit cards allow you to transition it into a traditional credit card after a certain amount of on-time payments.

• Credit-builder loans: Some financial institutions offer small loans where they will deposit funds into a locked savings account, and you will make payments over 6 to 24 months toward your loan to build credit. Once your loan term ends and you’ve made the payments, you get your accumulated funds back.
• Become an authorized user: Asking a responsible person to add you as an authorized user to their credit card account could help improve your credit. However, be aware that if they fail to make timely payments or extend their credit utilization too much, your credit score may take a hit too.

When might a prepaid card still be useful?

Prepaid cards don’t build credit, but they still might be helpful for some people. Reasons you might want to use a prepaid card include:

• Budgeting or limiting spending: Since you can only spend what’s available on your prepaid card, it may help you manage your spending if you use it for a dedicated purpose or only refill it after a certain amount of time.
• Making protected purchases without tying to a bank account: If your prepaid card falls into the wrong hands, you may be able to be reimbursed for some unauthorized transactions made with the card.
• Teaching basic financial habits: Prepaid cards may teach healthy spending habits to young people new to personal finance without some of the responsibility associated with a bank account.

Prepaid cards and your financial future

While prepaid cards won’t help you build your credit, they may be useful for managing your finances. If you want to control your spending, regularly loading a prepaid card might be beneficial for you. If you want to start building your credit, you may prefer to try a secured credit card or take out a credit-builder loan.

Additionally, you may want to speak with a financial expert to discuss other options for building your credit and managing your personal finances. Everyone’s financial preferences and capabilities are a little different, so if you’re unsure of where to go next, a professional may be able to help.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.