One of the most frequently asked questions in the credit industry is how a Visa debit card can help consumers in building credit.
It is a common knowledge that credit scores measure how well one manages debts, thus implying that to build credit, one must accrue debt and pay it off. Debit cards, as how banks see them, do not incur debt so there is no need for debit transactions to be reported to the credit bureaus.
At first, it seems that this type of card cannot directly cause your credit scores to up nor affect them in any way whatsoever- not until prepaid debit cards were issued.
A Credit Building Debit Card? How Possible Is That?
Banks are offering an attractive feature to consumers who want to build their credit: a prepaid debit card with a "credit building" feature. Before you apply for one, it's important to understand how this program works since prepaid debit card actually falls under a special category. It's not just a regular debit card but it isn't a credit card either.
You have known by now that building credit entails reporting of payments or financial activities that impact a three-bureau credit score- Experian, TransUnion and Equifax. With cards that offer "credit building" services, the reporting is done not to one of the three major bureaus but to an alternative reporting agency.
When A Prepaid Debit Card Doesn't Help
If it involves an alternative reporting agency, not any of those big three mentioned, then it only means that this "alternative" information is not included in the credit report financial institutions pull from the three major bureaus. So, if a potential creditor prefers checking on your credit history as reported to Experian, TransUnion and Equifax, you really can't make use of the information involving your prepaid debit card.
When Can a Prepaid Debit Card Help
This card still has promise in the field of credit building but it has to depend on the type of program. If it extends a small amount of credit to the card holder and requires payment in monthly installments over a specific period of time, then you have higher chances of building credit using a prepaid card. You can opt for taking out monthly payments automatically out of your account in order to build positive credit history. What makes this type of program work is when the card issuer reports your payment activity to one of the major credit bureaus.
In summary, it all depends on how the reporting is made- to an alternative reporting agency or to one of the major credit reporting agency.
Just recently though, alternative data collection and reporting agencies including PRBC and LexisNexis, both of which reports telecom service and other utility bill payments, are starting to gain clout as they gather a very large body of data reported systematically. This is a significant part of any alternative reporting agency since they can't help consumers build credit unless they amass a critical amount of card data.