3 Types of Credit Lines that Do Not Help Build Your Credit Rating

Before seeking a high limit loan, build your credit rating by using active credit lines responsibly. Nearly any use of credit or debt, if managed well, will boost your credit rating in a few short months. There are some types of lines, though, that do not provide as much benefit as others in terms of boosting your credit. You should avoid these options if you want to see the biggest changes in your score. 

#1 Prepaid Credit Cards

Prepaid credit cards do no actually use credit or debt in anyway. As a purchaser, you will have to deposit your own funds for use prior to activating the card. Once your funds are exhausted, the card will need to be reloaded if you plan to continue using it for purchases. The fees you charge, called activation fees, usage fees or reloading fees, are not interest rate fees. Instead, they are one-time service charges that go straight to the credit card issuer. The only reason to use a prepaid credit card is if you cannot qualify for an actual credit line. In this case, the card can be used for online purchases or traveling abroad. However, even with consistent and responsible use of a prepaid card, you will end up no closer to having a good credit score. 

#2 Cosigned Credit Lines

Cosigned credit lines do pose some positive credit benefits, but the possibility for increasing your score substantially when using a cosigner is slim. A lender asks you to use a cosigner when your credit or income alone do not justify the loan amount you are seeking. The cosigner allows you to borrow his or her credit. The loan is actually issued against that good credit score, and it has a bigger affect on that score than on your own. Since these good credit borrowers care about their scores, they will typically do what is necessary to keep the loan from defaulting. When the loan is paid off in full, whether you completed all payments yourself or gained assistance from the cosigner, you will see only a moderate boost in your score. 

#3 Secured Credit Lines

A secured credit line uses collateral, such as home equity, as the basis for extending funds. Again, this type of credit line may moderately improve your credit score if used consistently and responsibly. The effect will be diminished due to the collateral, though, that makes the loan very low risk. Low risk loans have a lower impact on credit scores. The lender is not giving you a vote of confidence in issuing the credit line. Instead, the lender is requiring you place collateral down because the lending institution does not feel you are worthy of complete confidence. This is apparent to future lenders who are considering issuing you a loan. They will additionally require collateral for the loan. Once you have paid off a few secured credit lines, though, you will see your score start to rise. You may be eligible for an unsecured line after using secured lines well for a number of years.


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