Credit Cards vs Prepaid Cards for rebuilding credit

PhillWiggins

Credit Cards vs Prepaid Cards for rebuilding credit

Iv seen that the Prepaid cards are good for rebuilding credit. Are they as good as getting a credit card. What is best?

Tixy

A credit card is better as it can cost you nothing (providing you only purchase things you were going to anyway and pay off in full each month).

The credit building prepaid cards cost around £60 over a year. And only show on your credit file as a £60 loan, not as managing a revolving credit account.

Ben8282

I don't see how a pre-paid card can do very much to rebuild credit as they don't actually offer any credit beyond a loan to cover the cost of your annual fee in advance which you repay as 12 monthly fee payments ... a bit like paying insurance premiums by instalment I suppose.

If you are a teenager or somebody new to the UK who has never had any form of credit before and wants something, anything, about them reported so that they can start a credit file, then the credit builder option will probably do some good in that sense but beyond that all it shows is that you are able to maintain an account which charges a small monthly fee and pay that small fee every month on time.

Credit builder can be dangerous though. Many people may get a pre-paid card, use it a bit, get fed up with it, stop using it and then forget to top it up without realising that credit builder is a commitment to continue to pay that fee every month for a year regardless of whether they use the pre-paid card or not. So the monthly fee is not paid and then a late on the credit file (or even a default)!

Try for something easy like a cheap SIM only mobile contract. It will do your credit file more good than the pre-paid card.

AmitSharma

Hi Ben,
I actually checked with Experian with regards to this when this was first launched a few years back and then a few other companies started offering similar products.

Apparently the size of the loan is irrelevant - or so they claim and as long as you make your regular payments back into your prepaid account, they prepaid company reports that back as a loan paid back and that impacts your history in a positive fashion.

I think it is a fairly good idea and a cheap way of improving your score and whilst prepaid companies are sure to hype this up, credit bureau's surely will not - so I am ssuming that experian have no vested interest here :0)

Cheers

Ben8282 wrote: »

I don't see how a pre-paid card can do very much to rebuild credit as they don't actually offer any credit beyond a loan to cover the cost of your annual fee in advance which you repay as 12 monthly fee payments ... a bit like paying insurance premiums by instalment I suppose.

If you are a teenager or somebody new to the UK who has never had any form of credit before and wants something, anything, about them reported so that they can start a credit file, then the credit builder option will probably do some good in that sense but beyond that all it shows is that you are able to maintain an account which charges a small monthly fee and pay that small fee every month on time.

Credit builder can be dangerous though. Many people may get a pre-paid card, use it a bit, get fed up with it, stop using it and then forget to top it up without realising that credit builder is a commitment to continue to pay that fee every month for a year regardless of whether they use the pre-paid card or not. So the monthly fee is not paid and then a late on the credit file (or even a default)!

Try for something easy like a cheap SIM only mobile contract. It will do your credit file more good than the pre-paid card.

Tixy

AmitSharma wrote: »

Apparently the size of the loan is irrelevant - or so they claim and as long as you make your regular payments back into your prepaid account, they prepaid company reports that back as a loan paid back and that impacts your history in a positive fashion.

When a subsequent potential lender searches your credit file they will be able to see that the fully paid loan was for £60. And certainly if your file is viewed by a person then they are going to know that it was a prepaid credit card or something similar. They are likely to take that into account when looking at how you've handled credit and won't be likely to view it the same as repaying a loan of several thousand.
Maybe if your file is being assessed by a computer then the size of the loan isn't such a factor.

AmitSharma wrote: »

I think it is a fairly good idea and a cheap way of improving your score and whilst prepaid companies are sure to hype this up, credit bureau's surely will not - so I am ssuming that experian have no vested interest here :0)

Cheers

But not as cheap as a subprime credit card which can cost you nothing.
So it may be appropriate as a last resort for someone who cannot get even a subprime credit card. But for the majority of people there are better ways to start building a credit history.

AmitSharma

Hi Tixy,
That is not how experian explained this to me,. They simply said the loan amount is irrelevant and will improve your credit score when you have a settled account but I guess, credit score is only one part of it - if they do look at the credit file then the size of that loan would reflect. I guess this helps you try and get upto a score where the file is not picked up for a human review perhaps?

Tixy wrote: »

When a subsequent potential lender searches your credit file they will be able to see that the fully paid loan was for £60. And certainly if your file is viewed by a person then they are going to know that it was a prepaid credit card or something similar. They are likely to take that into account when looking at how you've handled credit and won't be likely to view it the same as repaying a loan of several thousand.
Maybe if your file is being assessed by a computer then the size of the loan isn't such a factor.

But not as cheap as a subprime credit card which can cost you nothing.
So it may be appropriate as a last resort for someone who cannot get even a subprime credit card. But for the majority of people there are better ways to start building a credit history.