About 50 million people in the U.S. have no credit history because they do not qualify for a credit card or use lenders that do not report to the major credit bureaus. Although prepaid credit cards, which require the customer to load funds into the account, look and act like a credit card, they rarely build a traditional credit history. Instead, they report to "alternative" credit agencies.
Considerations
Prepaid debit cards do not build credit history with the national bureaus, according to Maxine Sweet, head of Public Education at Experian. The credit bureaus do not list information on prepaid accounts because they lack firm data suggesting that this type of account predicts a person's willingness to repay a debt. Also, issuers of prepaid cards often do not have the technological requirements and financial resources to report to the major bureaus.
Alternative Agencies
When a prepaid credit card claims it can help build credit, the issuer usually means it reports the account to an alternative agency, such as PRBC. Alternative credit agencies allow consumers to report just about any type of account as long as it can verify the payment history on the account. Alternative credit reports are usually designed to meet or exceed accuracy of traditional credit histories, so some lenders are very welcoming on alternative histories, according to Market Watch.
Potential Benefit
Even though alternative credit histories can have a better predictive value than a traditional history, alternative reports are not widely adopted in 2011, but the trend is to increase the acceptance of nontraditional histories. The company that develops the major credit scoring scoring system in the U.S., the Fair Isaac Co., has a scoring system similar to the FICO risk model preferred by most lenders that incorporates alternative payment data. In 2010, the FICO Expansion score helped 10 million people establish a credit history, so building alternative credit data now could help borrowers gain credit in the future.
Secured Account
Borrowers can probably find some kind of account that reports to the national credit bureaus. Secured accounts are notoriously easy to acquire, because the lender requires a security deposit on the line of credit. Retail and gas cards are also good options for borrowers with bad or no credit. However, consumers should use these types of accounts to eventually apply for a regular credit card account with a national bank.
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