Can I use prepaid cards or debit cards to help build my credit?

If you want to build credit, prepaid cards or debit cards are not the solution.  The key reason is that they don’t report information to the three major credit bureaus, which are Equifax, Experian and TransUnion.  The information compiled by the credit bureaus is used to determine your credit worthiness. Both current and historical information contribute to your credit report.

Prepaid debit cards

When you open a prepaid loadable card account, it isn’t considered credit; cash is loaded on the card for a specific amount.  When the money runs out, that is it.  There is no credit extension that lets you to pay at a later date or granting of any credit.  Even if you have your paycheck directly deposited onto the card, there is no advance or loan of the funds.

Some people choose to use prepaid cards as a substitute for checking accounts. The reasons include not being able to qualify for a banking account, don’t trust banks, or want to avoid bank fees. Prepaid cards don’t let you pay with funds not available on your account, so your account is not overdrawn and you don’t pay for non sufficient funds (NSF) or overdraft fees.  You do pay fees such as monthly fees, ATM fees, reload fees, paper statement fees, and customer service inquiry fees.

Debit cards

Debit cards are connected to your checking account. The transaction is deducted from your checking account almost immediately for all practical purposes.  Checking account information is not reported to the credit bureaus. The exceptions are unpaid returned checks and non sufficient funds fees.  If you don’t pay these fees, the bank may turn the unpaid amount over to a collection agency or sell them the account. The collection agency usually reports this information to the credit bureaus.  Collection accounts are considered negative and harm your credit.  There are considered a severe delinquency and can deduct as much as 100 points from your score.

The best way to build credit is to start with a secured credit card.  You deposit the same amount as the credit card limit in another account with the card user to “secure” your limit.  This amount ranges from $300 to $500. If you default they can take the money from that account.  Retail credit cards are usually quite easy to qualify for than bankcards.  You may want to apply for one of them.  Just remember that prepaid or debit cards don’t build your credit.

Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.