The answer is no… but also yes! So are you confused yet? Read on...
Prepaid Debit Cards: How They Work
A prepaid debit card alone cannot help you build or rebuild credit because no credit has actually been extended. In other words, you’re not borrowing any money from your debit card. Unlike a credit card, you need to put money on a prepaid debit card before you can start spending. For instance, if you load $50 on your debit card, the most you can spend is $50 (less any maintenance fees charged by your card issuer). Sounds just like a checking account right? The rules are basically the same, but there are some added benefits I will discuss later.
Where Credit Differs
In order to build good credit, you need to show you can borrow money and responsibly pay it back. The act of paying back money you owe will help build solid credit history, which will then be reflected in higher FICO credit scores. Your credit history and credit scores are not only what will help creditors decide whether to approve you for a loan or new credit cards, but they will also determine how much you're charged in interest.
Building Credit With Debit
So then, why do some prepaid debit cards claim they can help you build credit if you’re not borrowing any money? The reason is because debit card issuers often allow you to enroll in a special program designed to help people with no credit or with damaged credit build positive credit history.
A common type of program used by debit card issuers extends a small amount of credit to the debit card holder and requires payments in monthly installments over a specified period of time. The cool thing about these programs is that the monthly payments can be automatically taken out of your account so the work you have to do to build positive credit history is quite minimal. And since you are making regular payments on credit that has been extended to you through this special program, the debit card issuer will then report the payment activity to the three major credit bureaus and voila – you’re building positive credit history!
Recommended Credit Building Programs
A great example of a free credit building program available through a debit card is the one offered by AccountNow®. When you sign up for an AccountNow® Prepaid Visa® or MasterCard®, you can enroll in a free service that reports your bill payment history to a national credit reporting agency, PRBC®. After enrolling, you can start building or reestablishing your credit history debt-free simply by paying your bills on time!
Updated March 15, 2010: For a limited time, AccountNow® is offering a $25 bonus to new customers who sign up for direct deposit!</blockquote> Find more details on the AccountNow®, Prepaid Visa®, or MasterCard® Prepaid Cards visit our prepaid debit card section or check out our credit card guide.
