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Do Prepaid Cards Build Credit Scores

Prepaid debit cards do not build credit. But there are several new debit cards that can help build credit history.
do-prepaid-cards-build-credit

“Prepaid Cards don’t hurt your credit – But they don’t help it either”

Let’s get this out of the way first — Do Prepaid cards build credit? Absolutely Not. No matter what you may have heard, prepaid cards do not help build credit history.

The reason prepaid cards do not help build credit is that customers are using their own funds and no line of credit is extended by the bank or card issuer.

You have to use credit in order to build it. That means you need a loan, line of credit, credit card, or an account reported to the major credit bureaus.

With prepaid cards, no payment information needs to be reported to the credit bureaus. It’s very simple how prepaid cards work:

  • You load money onto via direct deposit, with cash, and in some instances from a bank account.
  • Use the prepaid card almost anywhere you would use a credit card like grocery stores, retail stores, websites, bill payments, and other platforms.
  • Once the money that you loaded onto the card has been used, you reload it with more money.

Nevertheless, prepaid cards continue to remain popular, typically among unbanked consumers (those who are not actively engaged in the use of traditional banking products). Unbanked consumers make up roughly 10 percent of the adult population but account for 23 percent of all prepaid card usage according to TD Bank’s recent Checking Experience Index study.

The problem with prepaid debit cards

The problem with prepaid cards is that unbanked people often use prepaid cards to manage not only daily expense transactions but also use prepaid debit cards for transactions typically performed with a credit card like renting a car or purchasing gas.

Although prepaid cards fill an important gap for the unbanked, prepaid debit cards do not help build credit like a credit card.

There’s no lengthy application and no risk of credit card debt but there’s also no chance to build a solid credit history even though prepaid cardholders use their debit card for everyday purchases.

People with credit cards can use their cards for everyday purchases, then pay in full and have those timely payments reported to the credit bureaus. Having lengthy history of timely credit card payments is a huge factor in maintaining good credit scores.

Without a credit history, the unbanked have little to no access to loans, credit cards, opening utilities like electricity, gas, or cell phones, renting an apartment, and in some instances applying for a job. Not having a credit history is a hindrance to everyday living.

It would be better for the unbanked to get a traditional checking account for people with bad credit, while opening an unsecured credit card for bad credit or debit card that reports to the credit bureaus.

Prepaid transaction fees can add up quickly

Prepaid cards can help control your spending because a reloadable card only allows spending up to the amount you have pre-deposited. But the fees may not be worth it. By the time you add up the transaction fees, monthly charges, ATM fees and reloading fees; a bank that does not use ChexSystems offering a traditoinal checking or savings account may be much cheaper.

Here are just some of the fees that may be associated with prepaid debit cards:

Monthly fee. A monthly fee is a fixed fee you pay each month even if you don’t use the card. Some prepaid card issuers may waive the monthly fee if you have your pay or benefits directly deposited into your prepaid account.
Transaction fee. A transaction fee may be charged every time you use the card for certain types of transactions.
In-network / out-of-network ATM withdrawal fee. An ATM may be in-network or out-of-network depending on your particular card and the particular network to which an ATM belongs.
Balance inquiry fee. You may be charged a balance inquiry fee if you check your prepaid card balance at an ATM or call customer service to ask about your balance.
Cash reload fee. A cash reload fee is a fee imposed by the retail location for adding money to your card.
Paper statement fee. Some prepaid cards charge a fee for paper statements. You may be able to avoid that fee if you sign-up for online statements only.
Inactivity fee. An inactivity fee may be charged if you don’t use your card for a certain period of time.
Bill payment fee. Some prepaid cards let you pay your bills online through the card provider’s website. Your prepaid card provider may charge a fee each time you use the program to pay a bill.
Foreign transaction fee. A foreign transaction fee is a fee your card provider charges when you use your prepaid card in a foreign country. T

To add insult to injury prepaid cards are often marketed to low-income consumers who may already be living from paycheck to paycheck. What these consumers may not realize is that there are alternatives, such as no-chexsystems banks or second chance checking. Credit unions can be a great alternative to traditional banks. Find a credit union in your area.

The Consumer Financial Protection Bureau requires prepaid card issuers to disclose fees that may be incurred by prepaid cardholders.


Why banks love prepaid debit cards

The prepaid card business is booming. The fees involved are lucrative and banks are heavily pushing them. JPMorgan Chase, American Express and many other big name financial institutions have thrown prepaid products into the ring. According to the Consumer Financial Protection Bureau, consumers are expected to load $167 billion onto prepaid cards this year. Prepaid cards do offer some benefits for consumers and some consumers are just feed up with banks and prefer prepaid products. But I think prepaid cards should be used temporarily, until a consumer is able to open a checking or savings account.

A ChexSystems, EWS or Telecheck record is not the end of a banking relationship. First, there is a time-limit these consumer reporting agencies can maintain negative information; and second, the information may not be accurate which means it can be disputed.

It is insulting that a bank may decline a consumer a traditional account but turn around and offer their prepaid product. No thank you. Consumers with negative credit and negative banking records are not second class citizens. Consumers deserve a bail-out just like the big banks. Don’t let a bank dump their high-cost prepaid product on you. Review the fees before signing up, especially if they offer overdraft protection. Some prepaid debit card providers offer the same kind of “courtesy overdraft” that covers purchases when you don’t have the cash necessary to do it. The amount of the purchase is then deducted from the card’s balance as soon as more money is loaded on the card, along with a hefty fee.

Prepaid card full disclosure

Consumers are not always aware of the fees involved in prepaid cards. The biggest problem with prepaid cards is full disclosure. Some prepaid cards can be purchased in grocery stores or other retail establishments. Not until the consumer opens the welcome package do they find out what fees, costs and risks may be involved.

Consumers are often caught off guard when prepaid fees start rolling in; or worse, when the issuer puts caps on losses if the card is stolen. Costs and risks are not always transparent. In fact, not all transactions are handled in the same manner as a debit card from a bank account; for instance, paying at the pump may cause a hold of up to $75 when using a prepaid card. It may be too late, after you have already paid, only to find out a hold is on your prepaid card.

Even more shocking, some prepaid cards are not FDIC-Insured. That means your money is not guaranteed if the bank fails. This is something consumers should know upfront.

More protections coming

The Consumer Financial Protection Bureau is working on providing more protections for consumers using prepaid cards such as:

  • Requiring cardholders to consent before they’re signed up for overdraft or lending attached to prepaid debit cards, and making it against the rules for prepaid debit cards to automatically take loaded funds to pay off overdrafts.
  • Giving cardholders the same fraud protections credit card holders get.
  • Making sure cardholders’ funds are insured by the Federal Deposit Insurance Corp.
  • Standardized labels for prepaid cards that clearly lay out the card’s fees.

Recent Prepaid Card Complaints

According to the Consumer Financial Protection Bureau’s monthly complaint snapshot, as of Feb. 1, 2016, they handled approximately 4,300 prepaid product complaints. The RuchCard prepaid debit card generated a large number of the prepaid product complaints. In Oct. 2015 many RushCard customers were shut out of their accounts. Some customers did not have online or ATM access to their money for several weeks.

Here is a snapshot of prepaid complaints handled by the CFPB:

  • Inability to access funds on card: Consumers complained they were unable to access funds loaded on their prepaid cards for an extended period of time.
  • Prepaid cards re-issued without former balance: Consumers complained that when their prepaid cards expired, the company that issued the initial card often refused to re-issue a card with the remaining balance before their original card expired.
  • Account access problems when disputing particular charges: Customers who wanted to dispute an unexpected charge complained that after contacting the company about the issue, the entire balance on their card would be frozen while the claim was under review. The claim process could often take an extended period of time, during which the consumer would be unable to access important funds.
  • Fees when using prepaid cards: Some consumers complained about a wide variety of charges, including: monthly, inactivity, transaction, balance inquiry, PIN change, and overdraft fees.

Temporary solution

If you must use a prepaid card think of it as a temporary solution. The biggest issues I have with prepaid cards are: (1) Many are predatory, focusing primarily on low-income, low information consumers; and (2) They do not help build wealth. Consumers use their own money to load onto a prepaid card and get nothing in return. If you do not have a place to grow your money there is no way you can build financial stability for your family.

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