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Guide to building your credit score using prepaid cards

Prepaid cards are one of the newest payment methods available. They are comparable in design to credit or debit cards and pay for things in a similar way. However, rather than being linked to a UK bank account or credit card, they have to be loaded with cash, similar to a pay-as-you-go mobile phone.

There are different types of prepaid cards, those for everyday spending, some designed as travel prepaid cards for overseas transactions and some that can help improve credit scores.

If you have a poor credit score, you have probably already noticed that being approved for a market-leading credit card or bank loan is unlikely. Many people end up in a vicious cycle of having a low credit rating, but not being able to access credit to improve it.

A credit-building prepaid card is a way to break the cycle; they're ideal for people wanting to boost their score, but are also a great way to manage finances.

Happy man uses prepaid card to rebuild credit

Improving credit scores

If you keep facing rejection from banks, building societies and credit card issuers, you will either have a poor credit score because of your credit history or no score as you've never accessed credit before. It would be a good idea to stop applying as this in itself can affect your credit score.

Prepaid cards give you the opportunity to demonstrate to lenders that you are able to manage credit responsibly. Not all prepaid cards can rebuild credit scores, but those that do give cardholders a loan, equal to the total value of the monthly fee for one year.

Instead of paying for the prepaid card in a lump sum, the value of the card is 'loaned' to you and repaid on a monthly basis.

By paying the card fee on time every month, you are effectively repaying the original loan. This will show up on your credit file and help you improve your score. This means you are not paying anything additional.

Managing your budget

If you're struggling with a poor credit score, then prepaid cards aren't just good for improving your credit; they can also help you manage your budget more effectively.

Many prepaid cards allow you to pay your household bills, such as gas, electricity, water and telephone. This means that you can preload the card with cash on pay day and ensure you have the necessary funds for your expenses all month.

If money is spent on a prepaid currency card in the wrong country, an overseas transaction fee will likely be applied; similar to when a standard UK prepaid card is used abroad.

As there are no credit facilities with prepaid cards, you don't have to worry about additional interest charges or racking up huge debts. Some prepaid cards also allow cardholders to view an online account, where you can track balances and spending.

What do credit building prepaid cards cost?

Prepaid cards are very rarely free to use, there are a number of different fees and charges associated with them. However, the costs do vary between providers, so it's worth knowing about how they work.

Card purchase: this is a one-off charge payable when applying for the prepaid card.

Monthly Fees: credit-building prepaid cards will almost always charge a monthly fee as this is how they help boost credit ratings. You can expect to pay anywhere between £5 and £10.

ATM/Withdrawal: if you are withdrawing cash from the card at the ATM, you may be charged. Some are completely free, whereas others charge up to £2 a time.

Loading Fees: in order to use the prepaid card you need to load cash onto it. Some card issuers charge a fee, but this will depend on the method you use.

Finding a prepaid credit builder card...

It's important to remember that not all prepaid cards are able to help you improve your credit rating. If this is your main reason for applying for a prepaid card, make sure you are comparing cards with this feature.

Once you've narrowed down your list to those cards with credit-building features, you will need to compare fees and charges. All card issuers have different fee structures, so it's worth paying close attention.

When comparing prepaid cards, don't just plump for the cheapest option. You will need to consider the other features and benefits offered by the card too. Particularly as credit-builder cards usually charge a monthly fee, whereas other may not.

If you're looking for ways to improve your credit score, but find that you are being declined for credit cards, overdrafts and bank loans, a prepaid card may be able to assist you in building a secure financial future.