Why Your Prepaid Card Will Not Help in Building Your Credit Score?

Do you know that prepaid cards offer an easy way to manage money without the complications of debt or credit checks? Such cards are usually recommended for budgeting, online shopping and for travel but there is a misconception that prepaid cards can also help improve your credit score whereas they cannot. Given below are the details about prepaid cards as to why they do not boost your credit score.

Prepaid Card and Credit Score

According to a 2023 report by Allied Market Research, the global prepaid card market is expected to reach $6.87 trillion by 2030 by growing at a CAGR of 18.2%. Millions of users are attracting towards prepaid cards for their convenience and low-risk nature. But while their popularity increases at the same time their impact on credit scores remains zero.

The main reason behind that is that the prepaid cards do not involve borrowing. You are spending money you have already loaded in your card which means there is no credit, no repayment and no data for credit bureaus to assess your financial reliability.

Understanding Components of the Credit Score

To explain that why prepaid cards do not affect your credit score, we will see here as to what actually affects your credit score. Credit Bureau Agencies like CIBIL, Experian and Equifax evaluate your financial behavior based on these criteria:

As the above table shows, none of the major components of a credit score are affected by prepaid card activity.

Prepaid Vs Secured Credit Card

Suppose Rohit, a recent college graduate, wants to build his credit. He starts using a prepaid card thinking it will improve his score. A year later, he checks his CIBIL report and sees no change. That is because prepaid transactions were never reported to Credit Bureau Agencies.

At the same time, his friend Akash uses a secured credit card backed by a Rs.10,000 deposit. He keeps his utilization below 30% and pays on time. Within six months, his credit score improves noticeably and he qualifies for a low-interest car loan.

Here, we can see that prepaid cards help with budgeting but do not help build credit.

You may also like "How Inactive Cards Can Quietly Damage Your Credit Score?"

Why Prepaid Card Activites Are Not Reported to Credit Bureaus?

Credit bureaus collect data from lenders and creditors not from you directly. Since prepaid cards do not involve borrowing:

• No loan or credit line is issued.
• Usage data is not shared with credit agencies.
• There is no payment history to report.

As a result, your prepaid card activity does not come in the eyes of credit bureaus.

Common Misconceptions

Many users confuse prepaid cards with debit or credit cards. Let us check out a few points:

• Prepaid Card is not Debit Card: A debit card is linked to your bank account. Prepaid cards are standalone.
• Prepaid Card is not Credit Card: No borrowing, no bill, no interest.
• Prepaid Card is not Secured Card: Secured cards require a deposit but function like regular credit cards—helping build credit.

When Prepaid Cards Are Useful?

While they do not boost your credit score, prepaid cards have a place in your wallet:

• Budgeting for groceries or travel.
• Teaching kids financial responsibility.
• Online purchases without risk to your bank account.
• For getting spending limits for safer transactions.

What Should You Use For Credit Score Boost?

If improving your credit score is your goal, you should consider these alternatives:

• Secured Credit Cards: Backed by a deposit and reported to bureaus.
• Retail Store Cards: Easier to qualify for and report your payment history.
• Credit-builder Loans: Designed to establish credit through manageable monthly payments.

Prepaid cards are great tools—but not for building credit. They are like prepaid phones which are convenient, contract-free and easy to control. But just like a prepaid phone does not help you qualify for postpaid service, a prepaid card will not move the needle on your credit score.

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