Credit Card Relief

 

Digging yourself out of debt can be a major challenge, especially when you have a checkered credit history. Paying off your creditors is tough enough, but what are you supposed to do when you finally get out of debt and can’t get a loan because of a bad credit score?

You may have heard claims that using a prepaid debit card can be a good way to patch up a bad credit history. But this is mostly a myth passed along by companies offering prepaid cards loaded with fees.

In reality, prepaid cards won’t help you fix your credit score. They’re not really credit cards because they don’t let you to borrow money you don’t have. They’re really just debit cards that aren’t connected to a checking account. And they come riddled with monthly, ATM, and reloading fees. 

Prepaid cards have nothing to report to the big three credit bureaus (Experian, Equifax, and TransUnion) because you’re not borrowing money and making monthly payments. Since the cards aren’t connected to the major credit agencies, there’s no way they can improve those credit scores.

So how can prepaid card companies get away with making claims they can help improve your credit?

Some of them do report to an alternative credit agency, called the PRBC (Payment Reporting Builds Credit.) PRBC gathers information about non-traditional sources like payments to landlords and utility companies. If you pay bills with your prepaid card, those payments can be reported on your PRBC credit report (for a monthly fee of course).

Unfortunately most banks and businesses don’t use PRBC scores when deciding whether to give you a loan or approve you for a credit card. So for now, prepaid cards may be an option when you can’t get a traditional credit card or checking account, but a credit or debit card makes the most sense if you can get one.

That doesn’t mean there aren’t ways to rebuild credit by using a card. The best way to do it is with a secured credit card. Secured credit cards are much more like a typical credit card. They let you make a deposit in the same way as a prepaid credit card, but your purchases are loaned to you instead of being subtracted from the balance of the deposit. The deposit gives the creditor added security in case you default on your payments.

A secured credit card comes with a credit limit, usually between 50-100% of the deposit you make. For example, if you make a $1000 deposit for a secured card, your credit limit will be between $500 and $1000.

Secured credit cards can help build better payment habits and show banks you can make payments on time. But before you apply for a secured card, make sure the creditor reports to all three major credit agencies. If not, future creditors won’t be able to see the payment history because it won't show up on your credit report or in your credit score.

When using a secured credit card, remember that you’re trying to build a positive credit history, not rack up more debt. Use secured credit cards to make small purchases you can pay off every month. If you can’t afford to pay for a purchase, don’t charge it.

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