Boost Your Credit Score in No Time: Learn How Prepaid Credit Cards Can Help

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Pacific Debt Relief is not a credit repair organization nor does our program aim to improve your credit score. The information below is for educational purposes to help consumers make informed decisions as it relates to credit and debt.

In today's unpredictable financial landscape, maintaining and improving your credit score has never been more crucial. Whether you're navigating through the aftermath of job loss, dealing with debt, or simply striving for financial stability, the tools and strategies you choose can significantly impact your financial journey.

Among these tools, prepaid credit cards stand out as an unexpected ally. Contrary to popular belief, these financial instruments offer more than just a way to make transactions without a bank account; they can be a stepping stone towards rebuilding your credit and regaining control of your finances.

In this comprehensive guide, we'll uncover how prepaid credit cards work, debunk common myths, and explore how they can be strategically used to boost your credit score, providing you with the financial leverage needed to achieve your goals.

If you'd like to skip the article and speak to a debt specialist right away, click here for a free consultation.

What is the difference between a prepaid card and a credit card?

With a traditional credit card, you have a credit limit that you can access, but you also have interest rates and revolving debt. With a prepaid card, your balance is the amount you have loaded on it.

Credit cards require a credit check, prepaid cards do not. Credit cards can add to your debt load, prepaid credit cards do not.

You can use both credit cards and prepaid credit cards to pay bills. You probably will not get payback rewards with a prepaid card.

Are prepaid credit cards reported to credit bureaus?

Unlike credit cards, prepaid credit cards are not reported to the credit reporting bureaus, so they do not improve your credit history. You can also get a prepaid credit card with poor credit. Regardless, there are some very good reasons to use prepaid credit cards.

Understanding the basics of credit scores

To see how prepaid credit cards can help your credit score, it helps to understand how your credit history is scored.

Whenever you take on debt, the debt and your behavior around it are reported to one of three credit reporting bureaus. These are TransUnion, Equifax, and Experian. There are others, but these are the major companies.

The most important factor in your credit score is your repayment history. This represents 35% of your score. If you pay late, skip payments, or are sent to collections, your credit score immediately suffers.

The second most important factor, at 30%, is your debt-to-credit ratio. This looks at how much debt you have compared to how much credit you have.

For instance, if you have a $1,000 limit on your credit card and use only $10, your debt-to-credit ratio is 1%. If you are using $999, your credit ratio is 99.9%.

You want to have a debt-to-credit ratio under 30%. Learn more about how to calculate your debt to income ratio.

At 15%, the next factor is the age of credit. Only time will make this factor increase. It considers how long you have had credit.

The last two rank at 10% each. These are credit mix and new credit applications. Credit mix is what type of credit you have. The more different types you have, the better your score.

New credit applications looks are how often you apply for credit. Do not apply for those store-branded credit cards just for the discount. It will temporarily decrease your credit score.

A good credit score is important to the ability to access loans. It has nothing to do with how well you are doing financially.

Someone with a lot of money can have a low credit score if they do not pay their bills on time and use a lot of their revolving credit (credit cards). Someone with very little money can have a great credit score because they are paying bills on time and not using much of their revolving credit.

The better your credit score, the easier you can borrow money. You will get better loan terms and get loans more quickly.

How prepaid credit cards can impact your credit score

As we stated, pre-paid credit cards are not reported to the credit bureaus. However, they do positively build credit history in indirect ways.

First, you do not need to pay your prepaid credit card because the money transfers immediately. Next, it will not increase your debt-to-credit ratio.

It can also increase your score by letting you focus on paying down your existing debt while still having the convenience of a credit card.

If you want to build credit, a prepaid credit card actively is not your best bet - you may want to consider a secured credit card. However, a prepaid credit card is a fantastic way to master budgeting and control your credit card use.

You can not spend more money than you have on your prepaid credit cards.

Using a prepaid credit card to rebuild credit

If your credit score is low, here are some great ways to use a prepaid credit card to increase that score.

1. Transfer all your automatic payments to your prepaid credit card and put enough money on it to cover those expenses. If you can not cover your expenses, cancel as many subscriptions as possible. This has two benefits. First, you stop adding to your credit card debt; second, you immediately see what you can not afford.
2. Focus on making on-time payments on your existing debt. This single factor will help you immensely as this behavior represents 35% of your credit score.
3. Focus on paying down existing debt. By decreasing your debt-to-credit ratio, you immediately start improving your credit score.
4. Use a prepaid credit card on sites like Amazon to not spend money you do not have.

The most important action you can take when using your prepaid credit card is to make payments to other debts on time. If you do not master this task, you will not improve your credit score!

Using a prepaid credit card

People may consider a prepaid credit card because these do not require a credit check or a checking account.

One of the benefits of prepaid credit cards is that you can automatically set up direct deposits to transfer money onto your card. Direct deposit can help you not miss payments assigned to your prepaid card.

Some prepaid cards offer mobile check deposits.

To use a prepaid credit card, you must regularly load money onto that card. You can use direct or mobile check deposits to load money onto most cards.

Pros and Cons of Using Prepaid Credit Cards

Pros of using a prepaid credit card include the following:

• No bank account, savings account, or checking account needed
• Can not spend more money than is on the prepaid card stolen
• Great way to limit spending
• More convenient than cash
• Will not harm your credit score - may even help you improve yours
• Mobile check deposit or direct deposit

Cons:

• Fees
• Lack of fraud protection