Can a Prepaid Debit Card Really Help Me Build Credit?
August 29th, 2008
The answer is no… but also yes!
Confused? Read on.
Prepaid Debit: How it Works
A prepaid debit card alone cannot help you build or rebuild credit because no credit has actually been extended. In other words, you’re not borrowing any money from your debit card. Unlike a credit card, you need to put money on a prepaid debit card before you can start spending.
For instance, if you load $50 on your debit card, the most you can spend is $50 (less any maintenance fees charged by your card issuer). Sounds just like a checking account right? The rules are basically the same, but there are some added benefits I will discuss later.
Where Credit Differs
In order to build good credit, you need to show you can borrow money and responsibly pay it back. The act of paying back money you owe will help build solid credit history, which will then be reflected in a higher credit score. Your credit history and credit score is not only what will help creditors decide whether to approve you for a loan or new credit cards, but it will also determine how much they charge you in interest.
Building Credit With Debit
So then, why do some prepaid debit cards claim they can help you build credit if you’re not borrowing any money? The reason is because debit card issuers often allow you to enroll in a special program designed to help people with no credit or with damaged credit build positive credit history. A common type of program used by debit card issuers extends a small amount of credit to the debit card holder and requires payments in monthly installments over a specified period of time.
The cool thing about these programs is that the monthly payments can be automatically taken out of your account so the work you have to do to build positive credit history is quite minimal. And since you are making regular payments on credit that has been extended to you through this special program, the debit card issuer will then report the payment activity to the three major credit bureaus and voila – you’re building positive credit history!
Recommended Credit Building Programs
A great example of a free credit building program available through a debit card is the one offered by AccountNow®. When you sign up for an AccountNow® Prepaid Visa® or MasterCard®, you can enroll in a free service that reports your bill payment history to a national credit reporting agency, PRBC®. After enrolling, you can start building or reestablishing your credit history debt-free simply by paying your bills on time!
<blockquote>Updated March 15, 2010: For a limited time, AccountNow® is offering a $25 bonus to new customers who sign up for direct deposit!</blockquote>
Find more details on the AccountNow®, Prepaid Visa®, or MasterCard® Prepaid Cards visit our prepaid debit card section or check out our credit card guide.
Posted By: Elisabeth Chan | Comments (3)Credit Score Myths
August 25th, 2008
I’ve been hearing a lot about credit score myths these days in the Credit Talk forums.
You know the ones: “quick and easy ways” to magically add points to your credit score in a short period of time. Usually they are the same ones that have been circulating for years, like these two:
- Close any credit card accounts you don’t use, increase your income and your credit score will increase!
- Just use cash to pay for everything and your credit will be perfect!
I hope you haven’t fallen for any of these. If you have, I’m happy you are taking the time to visit this site and educate yourself about credit cards. It’s definitely a step in the right direction.
Top Credit Score Rumor
Many of these myths probably began when some ingenious word of mouth marketing campaign was put in place by a highly-paid marketing professional on behalf of a credit card company. My personal favorite is when people actually try to convince me that leaving a monthly balance on their credit cards will make them look like a better credit risk and therefore build their credit score faster. I have no idea why this one is so easy for people to believe. It just doesn’t make sense.
Remember, more monthly balances simply equal more interest income for credit card issuers. Aggregate that additional income from millions of people who believe the rumor, and we are talking about a lot of cash.
The truth: the speed at which you establish credit has absolutely nothing to do with whether you carry a monthly balance or not. The things that really matter have never changed:
- Pay your bills on time
- Manage your credit utilization
- Pay down debt
- Correct errors on credit reports
- Apply for new credit sparingly.
Do you have any favorite credit card myths you’ve heard from friends and relatives? If so, we would love to hear about them. Leave a comment or check out our credit card learning center for more information.
Posted By: Joshua Heckathorn | Comments (1)
