If you’re looking to build up your credit, prepaid cards are the wrong path to take
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Dear Opening Credits,
I have a question about the Walmart MoneyCard MasterCard With Cash-Back Rewards. Does this card report to all three bureaus on a monthly basis? I have no credit history due to using cash only since bankruptcy in 2011 and am now trying to a build new history without using fee-charging cards. – Stanley
If your main motivation to get a card is to start and then build a credit history, set this application in the no-go pile. It will do nothing to help you achieve that goal.
Prepaid cards can be terrific tools, as they allow you to shop without cash in hand. You just load the card up with available funds, then use it as you would a credit card. However, there is no borrowing involved. You’re just tapping into the money you have deposited. Think of it as you would a debit card that is linked to a checking or savings account. Your spending is limited to what you have in the bank – or in this case, on the card.
Because the issuer isn’t lending you anything and no payments are involved, there is nothing for the issuer to report to TransUnion, Experian and Equifax, the three credit reporting agencies. These companies compile data that is sent to them by lenders and other entities, and turn it into ever-updating reports. Businesses, including mortgage companies, credit card issuers and insurance firms, check these files to know if you’re a good candidate for their product. To simplify the system, a credit scoring company takes all that data from your reports and inputs it into a mathematical model. Out pops a number that indicates what level of lending risk you are at that moment.
All this means that you’ll have to work with a company that sends information about your activity to the credit reporting agencies. A credit card is the best way. You can take out a loan, but if you don’t need to finance something, it will be unnecessary and interest will be built in.
With a credit card, you can charge just what you’ll repay by the due date and the process can be free. I say “can be” because some accounts do come with annual fees. They’re typically fairly low, though, with $25 to $35 being average.
Since you’re rebuilding your credit, your best bet is to start with a secured card. Make sure the issuer does report to these agencies before applying. Most do, but some outliers don’t. With secured account, you put down a deposit set by the issuer, which guarantees the credit line. If you run up a balance and then let it go delinquent, the issuer can claim the amount owed from the cash held in deposit.
Mind that like with all other credit products, you’ll need a source of income to qualify. Oh, and some do offer cash back and other rewards programs. Shop thoroughly and wisely. Only apply for the card for which you’re likely to be approved and that has the right bells and whistles for you.
Once you’re granted the card, the account will show up on all three of your credit reports. The issuer will notify the credit reporting agencies of the credit line amount, as well as your payment pattern and ending balance. The longer you use the card while also paying on time and maintaining no or very low debt, the better your credit rating will be! After about a year using the secured card, you will most likely be able to qualify for a regular, unsecured card. Once approved, you can safely close the secured card and your deposit will be refunded, minus any fees.