Does Using Prepaid Credit Cards Help Your Credit Score?

Some people who struggle to maintain a good credit history or who have experienced credit trouble in the past consider using so-called "prepaid" credit cards in an effort to help increase their credit scores. While prepaid cards can help you with non-cash purchases, they aren't credit cards at all, and most have little or no impact on your credit score.

Credit Score

When you request that a lender extend you credit, the lender wants to know whether you'll pay back the loan. To accomplish this, lenders look at your credit score, a number that indicates how you've handled credit in the past. If, for example, you've defaulted on loans or gone through a bankruptcy, your score will be low and you are unlikely to receive credit. To increase your score, you have to demonstrate that you can use credit responsibly.

Prepaid Cards

A "prepaid" credit card is not really a credit card. When you obtain a prepaid card, you essentially trade your cash for a piece of plastic. The card tells anyone with whom you're conducting a transaction that there is cash available to pay the money you owe. A credit card, on the other hand, indicates that the credit card issuer will pay the bill even if you don't have any money. You don't have to have good credit to obtain a prepaid credit card, because it is not a form of credit.

Increasing Scores

To improve your credit score, you have to show you use credit wisely. When you add money to a prepaid credit card, you are only showing that you can use money you already have. This is not credit. Using credit is using someone else's money and then paying it back. To increase your credit score, you have to pay back all debts on time and take other actions, such as limiting the amount of your available credit you use.

Alternatives

You can consider alternatives to a prepaid card if you want to increase your credit score. A secured credit card, for example, is a true credit card, because the lender extends credit to you. However, you have to pay a security deposit or provide some other form of security to the lender before you can obtain this card. If your credit is good enough, you may consider obtaining a traditional unsecured credit card. The kind of card you can get if you have bad credit typically has high interest rates and low limits, but using it responsibly will increase your score.