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Why Prepaid Cards Won't Rebuild Credit

The first thing we should clear up in this discussion is the fact that there's no such thing as a "prepaid credit card".  It simply doesn't exist.   If anyone references a prepaid credit card in a conversation with you, what they actually mean is a "prepaid debit card". The terms unfortunately get mixed up all the time, even though "debit" and "credit" mean very different things, but the fact is all of these cards are debit cards. 

So now that we've got that confusing point cleared up, let's move onto how these prepaid debit cards work and how they affect your credit scores. Prepaid debit cards are actually quite simple financial products.  They basically work just like a debit card that's linked to your personal checking account, only there's no checking account to worry about.

  You deposit money on to the prepaid card, and then you're able to use it to spend up to the amount of money you deposited. When the money is getting low, you can reload the card and keep using it in the same fashion. It's as simple as that.

Credit cards have become much more difficult for consumers with less-than-perfect credit to get a hold of in recent years, which is one reason why we've seen so many consumers turn to prepaid debit cards in order to continue enjoying the convenience of paying with plastic. I'm not saying that prepaid cards are only used by individuals with bad credit, but if you do have poor credit scores, you'll find that your credit card options are really slim these days. And since prepaid card approvals are not dependent upon credit scores, they can be an easy way to ditch using cash for everything and finally get some plastic back in your wallet.

So can prepaid debit cards help rebuild your credit too? This is the question about prepaid cards that gets brought up all the time, and the answer is most definitely NOT.  

A prepaid debit card isn't a "credit" product, so there are no payments for a lender to report to the credit reporting agencies. This means payment history associated with a prepaid card will not show up on your credit reports, which in turn means your credit scores will not improve though using a debit card alone.   If you're interested in products that will help rebuild your credit scores, what you should really be looking into are either secured credit cards or unsecured credit cards for bad credit.

Many of these cards report payment history to all three of the major credit reporting agencies, which means your credit scores can be improved through responsible use, but don't be surprised if you have to pay a higher annual fee to get that opportunity once again. Photo by DeclanTM

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Joshua Heckathorn's picture

Joshua Heckathorn was the President and owner of Creditnet.com. He shared his unique insights about credit cards, credit scores, investments, and all aspects of personal finance on Creditnet's blog, Credit¢ents. Joshua received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his Master of Business Administration from Seattle University in 2009.

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