Prepaid debit cards that help build credit

Building your credit score can be tough. Whether you're starting from scratch or working to repair a low credit score, there are certain tools that will help you build a solid credit foundation a lot faster and a lot less painfully than other options.

One of those tools is a credit card. Opening a credit card and using the account responsibly by making purchases and paying your bill every month can be one of the best ways to build your credit. It's also one of the easiest -- especially if you're making purchases you would have already made with your debit card.

That said, actually securing a credit card that builds credit can often be easier said than done. If you have no credit score or a very low or blemished credit score, lenders can be wary of approving you for a credit card account. In some cases, this may lead you to look for other types of credit cards, like prepaid cards, to get the job done. But can you build credit with a prepaid card? Here's what you should know.

Does a prepaid credit card build credit?

No, prepaid credit cards do not help you build credit. That's because prepaid credit cards are not the same as credit cards, and one of the downsides is that you are prepaying money to a card to use -- not borrowing from a lender. Prepaid cards are more like gift cards or debit cards than credit cards. You load money onto a card that you swipe or use online to make payments.

Because you aren't borrowing funds, the prepaid credit card information does not have any information to report, like your payment history or balance, to the credit bureaus. Without that information to report, the card won't affect your credit score positively or negatively.

How do prepaid credit cards work?

A prepaid credit card is exactly what it sounds like: it's a card you load money onto, typically from your bank account, via direct deposit, or with cash. When the money that you loaded onto the card has been used, the card will no longer work unless you reload it with more money.

You can use these cards almost anywhere you would use a credit card. Grocery stores, retail stores, websites, bill payments, and other platforms typically accept these types of cards, though it will depend on the type of prepaid credit card you choose and the retailer's policies.

These cards can be useful for budgeting purposes or for people who don't have access to a bank account or debit card, but there are some potential downsides. For example, most prepaid cards have monthly fees that come with the card. Some will also charge you for other things, like loading cash onto the card. If you're considering one of these cards, it's important to do your research and make sure that the card does not come with a ton of fees attached to it.

And, if you're looking for a credit card that builds credit, you may want to opt for a completely different type of card instead -- which may include one of the card types below.

Credit-building alternatives to a prepaid card

The good news is, though, that while prepaid credit cards won't help to build credit, there are other types of credit cards that will allow you to build your credit score -- and you can typically qualify for them with a low or no credit score. These include:

Secured credit cards

Secured credit cards are one of the better options for people trying to build credit. These cards work like regular credit cards, but the main difference is that you have to put down a security deposit, which is typically the equivalent of your credit limit. For example, if you put down a $500 deposit on a secured credit card, you will typically have a $500 credit limit.

There is a wide range of options for secured credit cards, and many major card issuers will offer these to customers who don't qualify for a typical credit card. Some will require credit checks, others won't, but these cards are meant to help you build credit, so they do report to the credit bureaus each month -- just like a regular credit card.

Eric Bank has been covering business and financial topics since 1985, specializing in taking complex subject matters and explaining them in simple terms for consumer audiences. Eric's writing regularly appears on Credible.com, eHow, WiseBread, The Nest, Get.com, Zacks, Chron, and dozens of other outlets. A former software engineer, Eric holds an M.B.A. from New York University and an M.S. in finance from DePaul University.

In response to an article about free and low cost prepaid cards, a reader asked about building credit with a prepaid credit card: “Is using a Prepaid Credit Card a way to build a credit history for someone who doesn’t have one?”

This is a great question, and underscores how confusing the different types of credit and debit cards can be. The short answer is that prepaid debit cards cannot help you build your credit history. And no prepaid card helps build your FICO score. We'll sort through all the different types of credit, debit and prepaid cards, and how each generally can affect your credit score and credit history. But first, let's take a look at some of the best credit cards (not prepaid) that can help you build credit.

Capital One Platinum Secured Credit Card

The Capital One Platinum Secured Credit Card is designed for those looking to rebuild their credit. Capital One reports your payments to each of the 3 major credit agencies. In addition, Capital One gives you free access to your credit score and tools to help you manage and track your progress.

There is an annual fee to own the Capital One Platinum Secured Credit Card.

Prepaid Cards that Build Credit

Let's start by reviewing the types of credit and debit cards:

Credit Cards: Credit cards like Chase, or Citi represent a loan each time you use your card. Because you are borrowing money, your account is reported to the major credit bureaus. As a result, using a credit card will impact your credit score.

Debit Cards: Debit cards are issued by banks and generally are tied to a checking account. While debit cards today look like credit cards, including the Visa or MasterCard brand, they are more akin to writing a check. When you use a debit card, the cost of the transaction is taken out of your checking account. As a result, debit cards do not help you build credit.

Prepaid Cards: Prepaid cards are very similar to debit cards, except that they are not linked to a bank checking account. Instead, you transfer money to the card (via direct deposit, online, at certain stores, etc.) and then can use the card anywhere that accepts Visa or MasterCard. While these cards are sometimes referred to as prepaid credit cards or prepaid debit cards, they are really just prepaid cards. Because you can only spend the money you have already added to the card, prepaid cards do not represent a loan like a credit card. As a result, prepaid cards generally do not help you build your credit.

Related: Why are Millennials Using Prepaid Credit Cards?

Are Prepaid Cards a Good Way to Build Credit

While you can monitor your credit with some prepaid cards, as noted above, you won't be affecting your FICO credit score by using a prepaid card. Low cost prepaid cards are a safe, convenient way to manage money for those that want to avoid credit and are unable to qualify for a checking account (usually because of Chexsystems). But don't count on an increase in your credit score from a prepaid card.

There are other alternatives. For example, you may be able to qualify for a store credit card (e.g., Sears or Home Depot). By making a few purchases each month for items you'd buy anyway and paying off the balance in full each month, you'd build your credit at no cost. Of course, the risk with credit is that you'll spend more than you should and find yourself in debt at double-digit interest rates. But if you can manage the credit well, you can build a credit history and improve your credit score at no cost.

Alternatives

Petal® 1 “No Annual Fee” Visa® Credit Card isn’t your average, everyday credit card. Rather than make an application decision based on your credit score and credit history, Petal® 1 “No Annual Fee” Visa® Credit Card—issued by WebBank, Member FDIC—reviews your banking history to create a Cash Score. This shows the bank your creditworthiness, allowing them to offer you competitive credit and rates.

After you apply for the Petal® 1 “No Annual Fee” Visa® Credit Card, you’ll receive an instant decision. If you’re approved, you’ll then learn more about your credit limit and interest rate. The credit limit range is $300 to $5,000.

Other features of the Petal® 1 “No Annual Fee” Visa® Credit Card include:

• Between 2% to 10% cash back at select merchants
• No annual fee
• No international fees
• Autopay

Read more: Petal® 1 “No Annual Fee” Visa® Credit Card Review

Self is a unique company that offers to help you build your credit score. Instead of applying for a credit card which has high fees or a high interest rate, Self has created a way for you to increase your credit score through a self funded loan.

After you’ve applied for your loan and selected a payment option, you’ll be on the path to building your credit. If you already have a lot of high interest credit card debt hurting your credit score, you can lower your utilization rate by paying it off using a 0% APR balance transfer credit card. This could save you hundreds and increase your credit score, too.

Once you’ve completed your payments, the entire principal is returned to you minus the interest rate.

Related: Self Review

For example, if you take out a $525 loan on repayment terms of 2 years; the interest rate is 13.16%. This means that over the two year period you pay your loan back, you'll pay back a total of $609; $525 in principal and $84 in interest.

• Initial loan activation fee of $9, $12 or $15
• No repayment penalty. Pay your loan off at any time.
• Four different loan options ($525, $545, $1,000, $1,700)
• All funds are FDIC insured.

Quick Links: Here is one of our favorite cards that can help you build credit:

Related: If you’re looking for an easy way to increase your score, sign up for Experian Boost™. This service is free and can see when you make your monthly payments like your utility bill and cell phone bill on time. When you do, your FICO Score can get a boost.

Learn More: Read our Experian Boost™ Review

If you've used a prepaid card to build credit, please leave a comment and let us know how it worked out for you.

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