Is a Prepaid Credit Card Good to Establish Your Credit?

A good credit report reflects a mix of credit use, including installment debt, such as a car payment, and revolving debt like credit cards, but getting unsecured credit like a credit card when can be difficult if you have no previous credit. Prepaid cards offer one option for establishing your credit, but another credit card option may be a better deal.

Prepaid Credit Cards

Prepaid credit cards work similarly to gift cards---you purchase a card for a certain amount of money, say $50 dollars or even $200, and then use the card for purchases. Some cards allow you the option of adding more money to the card as the balance on the card is depleted, so that the card can be used again. Major credit card companies such as Visa and MasterCard offer prepaid credit cards.

How Prepaid Credit Cards Establish Credit

Some prepaid cards can help you build credit by reporting your card use to credit bureaus, but there are often drawbacks. Some cards report to a second-tier credit bureau, PRBC, which is not often used by creditors. Others report to major credit bureaus, such as Experian and TransUnion, but report the account as an installment account rather than a revolving account. While installment loans are an important part of your credit report, revolving credit often scrutinized more closely by creditors, who figure you are a good credit risk if you have a good history of repaying what is essentially unsecured debt.

Credit at a Stiff Price

The biggest drawback to using prepaid credit cards is the fact that you are charged dearly to use your own money. Prepaid cards often come with an array of unattractive fees, including an activation fee, a monthly maintenance fee, a fee for using the card as an ATM/debit card, and even fees for putting more money on the card. For instance, Bankrate.com notes one card that offers a six-month plan that costs $59.95 for the purchase fee, minimum deposit and monthly fee for the plan period. On top of this charge, fees also include $1.50 for ATM withdrawals, a $1 fee if the ATM withdrawal or point-of-sale transaction is declined, a $9.95 fee to replace a lost or stolen card and a cancellation fee of $6.

A Better Option

Secured credit cards, which work much like prepaid credit cards, are a better option for establishing credit. Instead of purchasing a prepaid card, you put a deposit equal to the card's credit limit in the issuing bank. As long as you pay as agreed on the card, the deposit remains in the bank, untouched. Look for a secured card with reasonable fees, and use it lightly, making on-time payments each month. Within 12 to 24 months, you will have established credit, and if you've used your card wisely, you will likely graduate to an unsecured card.