The easiest way to build credit -- particularly for a young person -- is with plastic. But not every card is going to give your credit score a big boost. Here are some payment methods that may not be building credit the way you think they do.
Data from Experian finds Millennials are slow to build solid credit scores, partially due to an aversion to traditional credit cards. But it’s important for young people to realize not every piece of plastic is going to give their credit score a big boost. And some of the newer cards that young folks tend to use heavily aren't suitable for boosting credit.
Here are some payment methods that may not be building credit the way you think they do.
Prepaid debit cards
Banks may be pushing young customers onto reloadable prepaid debit cards, but there is one important caveat to be aware of before you buy into the craze. Similarly to traditional debit cards, the payment method is not going to help you build credit, because banks and issuers aren’t in the habit of reporting information on them to the three major credit bureaus. The credit bureaus, in turn, aren’t really too keen on receiving this info since prepaid debit cards users have not been extended a line of credit.
“You’re not demonstrating you can use credit,” Maxine Sweet, vice president of public education for Experian, says. “You’re demonstrating you can use a plastic check.”
The distinction is important to make since several moves in the booming prepaid space can easily cause consumer confusion. For instance, American Express is letting its prepaid users upgrade to charge cards after demonstrating responsible use, but the prepaid payment histories won’t appear on your credit report and are really only useful in initially securing a traditional Amex product. Meanwhile, Suze Orman’s partnership with Trans Union does provide prepaid card users with access to credit monitoring … despite the fact that the bureau has not yet agreed to use the data on its reports.
Secured cards minimize the risk of default by requiring applicants to make a down payment upfront that matches the card’s line of credit. They’re popular amongst credit newbies who have yet to establish a payment history or under-banked consumers with poor to mediocre credit scores. But the payment method’s target audience – which doesn’t always have a lot of options when it comes to building credit profiles – attracts subprime lenders who may not report the card use to Experian, Equifax or Trans Union.
“Some banks definitely report them and some don’t,” Sweet says. “Work with a reputable bank and ask ahead of time if the card use is going to be reported.”
Charge cards differ from traditional credit cards in that the accountholders must pay balances off in full at the end of the month. If they don’t, a penalty annual percentage rate (APR) will kick in and a late payment fee may be applied. Charge cards can prove helpful to those prone to overspending, but they may not benefit someone who is actively trying to build their credit score.
“It doesn’t help your utilization (total credit card balances/total credit card limits),” Sweet says since issuers don’t report a credit limit along with your payment history. While this won’t cause your score to fall, it can prevent you from netting premium points for having a strong credit-to-debt ratio. This is why, if you are looking to enter the loan market in the near future, Sweet suggests requesting an upgrade to a traditional credit card with a decent credit limit.