Prepaid credit card: Can it help build your credit score? Find out

Prepaid credit cards, commonly known as loadable credit cards or prepaid cards, have gained notoriety lately, as a viable alternative to banking. But do prepaid credit cards actually boost or lower your credit score? Let’s look into this in-depth and how it affects your credit health.

What is a prepaid credit card?

To make purchases using a prepaid credit card, you will need to load your prepaid credit card with funds. You are spending your own money, similar to a digital wallet, so it is not credit. It is a prepaid option with some conveniences such as no requirements for a bank account or credit check with all the convenience of tap-to-pay, online shopping, and international acceptance.

Fees and charges to consider

Prepaid cards have their own cost structure, even if they are convenient:

• Activation or issuance fee: A one-time fee when acquiring the card.
• Reloads: Fees for online, cash, or bank transfers of money onto the card.
• Monthly or annual card maintenance fee: Regular fixed fee to maintain an account.
• Fees for ATM withdrawals: For cash withdrawals in India and overseas.
• Inactivity/dormancy fees: Used at times when there isn’t any need for a few months.

When making your decision on a prepaid card, you should assess the cost structures, as these fees could compromise the convenience of the card.

(Note: Please visit the bank’s official website to learn more about the prepaid card of your choice. It is crucial to choose the one that best meets your needs.)

Do prepaid credit cards affect your credit score?

No, your spending habits are not reported to credit bureaus because you are not taking out a loan.

1. No credit history accumulation, there will be no record that your account is active credit.
2. No credit utilisation impact, because there is not a credit line.
3. No payment behaviour impact, either on time or late.

Pre-paid cards have therefore no impact in improving or degrading your credit history.

Deepak Kumar Jain, Founder and CEO of CredManager.in explained, “A prepaid card doesn’t involve borrowing or credit; it is a card that is preloaded with a certain amount that you can use to pay for travel and other expenses. Once that balance is exhausted, you need to reload it for spending. It’s like spending from your wallet or debit card; there is no credit or borrowing involved, so it does not impact the credit score. The uses of prepaid cards are not reported to credit bureaus like CIBIL or Experian, so they will neither help you build or improve your credit score nor impact it negatively.”

Why choose a prepaid credit card

Prepaid cards have many benefits:

• Budgeting control: You cannot spend more than what is loaded.
• Great option for online purchases: Increase safety if doing business with unknown vendors.
• No risk of debt: You get the convenience of a card without the risk of credit.
• Great for unbanked or for kids: A financial tool for beginners.

For their characteristics they are truly the best option for gifting, travel, and for budgeted purchases.

In conclusion, prepaid credit cards can be an excellent alternative for spending options for travel, gifts, and budgeting, but they have no impact on credit scores. Overall, unsecured credit cards with low limits, secured credit cards, and payments made on a regular loan are much better products for individuals who are serious about improving their creditworthiness.

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Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.