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Building Credit with a Prepaid Card - Not Yet

Many people are switching to prepaid cards to help them manage their monthly finances and avoid costly overdraft fees. In addition, for people who do not have access to a traditional bank account, a prepaid card offers a way to have paychecks or state and federal benefit payments deposited directly into their prepaid account. This may be a great alternative to paying fees for cashing a check. It also allows you to make electronic payments for things like utilities, cell phones and even rent.

However, there are things you should know about prepaid cards before signing up for the service.

Prepaid cards – what to know

1.       Prepaid cards are not credit cards. The money you use is your own. You are not borrowing money; the money you spend does not have to be repaid.

2.       Prepaid cards do not report to the credit bureaus and thus do not build credit. The money you use is your own, so there is no repayment agreement like there would be if you were borrowing money to purchase a car or a home. This is why it does not build credit.

3.       Many prepaid cards have fees. It is important to read the fine print before agreeing to load money on the card. And, if you have questions, call the customer service number and get clarification about the fees. They may include:

a.       Sign up fees

b.      ATM charges

c.       Fees to pay bills

d.      Fees to deposit money on the card

e.      Fees for checking your balance

4.       Unlike a bank account, prepaid cards may not be covered by deposit insurance. If the company that is holding your money fails, you may never get your money back.

There is a lot of talk in the industry about how prepaid cards may benefit people. As we highlighted above, prepaid cards with low-to-no fees can be beneficial for someone being hit with overdraft fees or for someone who cannot open a checking account right now.

If your focus is on building credit when you don’t have any or because what you have is negative, check out our blog, Positive Credit through Secured Credit Cards

Published Dec 13, 2012.