With the rise of digital commerce, card payments now account for a large portion of transactions in retail and online settings.
Though members of the public are increasingly turning to card-based payments, not all cards are the same. Prepaid cards and credit cards can be used in similar ways, but each type of card is financed through quite different means.
Those differences mean that using a prepaid card is a convenient way to spend money without impacting your credit card or its credit score. Here's what you should know.
What Is a Prepaid Debit Card?
Prepaid debit cards are payment cards that you can use to spend a pre-loaded balance.
You must load funds onto a prepaid card before you start using it to spend money. You can load funds onto your prepaid card in a variety of ways, but you can usually do so by sending money to your prepaid card provider from another account.
Prepaid cards are sometimes offered by companies better known for issuing credit cards, such as Visa and Mastercard. However, prepaid cards are not actually credit cards. Unlike credit cards, prepaid cards do not come with a monthly bill that contains a record of your earlier spending; instead, they are funded in advance of spending.
What Is a Credit Score?
A credit score is a rating that represents your credit risk.
Your credit score is most important in relation to your credit card, as it will determine your spending limits and interest rate. It also indicates how likely you are to pay your credit card bills on time. The most widely used credit score system is the FICO Score.
Your credit score may be affected by various factors. If you make payments on time, use only a small percentage of your credit limit, and have held your account for a significant amount of time, your credit score will likely be raised by your card provider.
In addition to impacting your credit card rates, your credit score can also affect the terms of your other financial services, such as loan interest rates, insurance premiums, qualification for a mortgage, and more.
Do Prepaid Debit Cards Affect Credit Scores?
Prepaid cards almost never affect credit scores. As long as you load funds onto your card from a bank account or similar service, your credit score and credit card will never come into play.
Prepaid cards may come with other transaction fees and reloading fees, but you will never have to pay monthly interest on prepaid card purchases. Since you won't pay credit card-related fees, spending with your prepaid card won't affect your credit score.
If your prepaid card provider allows you to load funds from a credit card, you will have to pay your credit card bill for that card as usual. However, this feature is rare and prepaid cards often cannot be loaded with a credit card at all.
This approach to spending means that prepaid cards are a great way to spend money if you have a poor credit score - or even if you have no credit score at all. On the other hand, if you want to build up a credit score, you'll need to look at other options.
Alternative Options to Help You Build Your Credit Score:
There are plenty of ways to improve your credit score. For example:
Make payments on time. If you regularly make payments by your bill's due date, you'll be given a higher credit score. If you miss a payment, pay as soon as possible. You may be able to set up automated bank payments to ensure that bills are paid on time.
Pay as much as possible. If you can't pay the full amount that you owe on your monthly credit card bill, try to make the minimum required payment.
Don't go over your limit: First-time credit card users typically have a credit limit no higher than $1,000. Long-term credit card users have an average limit of $30,000. It's best to use only a fraction of that limit (between 7% and 30%).
Ask for a higher limit. Sometimes it is possible to get a higher credit limit just by asking. Talk to your bank or credit card provider for more information.
Keep your account open. The longer you've maintained an open line of credit, the higher your score will be. Even if you stop using one of your credit cards, you should keep it active to show that you have used it responsibly in the past.
Maintain a credit mix: By maintaining multiple diverse lines of credit such as credit cards, loans, and mortgages, you will likely be given a higher credit rating.
Become an authorised user: You can become an authorised user on a credit account that belongs to a spouse or a family member. You will share a line of credit with that individual, but you will get your own card for spending. This option is useful if you don't yet have a high credit score in your own right.
When Is a Prepaid Debit Card a Good Idea?
Prepaid debit cards are a good option if you don't have a high credit score.
A prepaid card is also useful if you want to limit spending. You'll never spend more money than you have loaded onto the card. This is a useful feature if you are sharing a card between business members or if you want to control your own spending.
Prepaid cards are also useful if you are concerned about your card being lost and stolen. If someone gains unauthorised access to your card, they won't be able to spend more than the card's balance, and you may be able to disable the card remotely.
Finally, prepaid cards are easy to reload. While bank savings and checking accounts may include a debit card, those accounts may also have spending and usage limits.
With a prepaid card, you can deposit or load funds in a variety of ways. Depending on the service, you may be able to load your card via bank transfer, third-party payments, ATM deposit, or even in cash at an in-store location.