Editorial Policy

PayPal Credit won't help build your credit score

Erica Sandberg

September 15, 2015

QHi Erica,

I am trying to build up my credit score, so I opened an account with PayPal. They gave me a credit line of $500. It can be used only online, so I use it for eBay or any online shopping that accepts PayPal. I have received conflicting advice about how and when I should make payments on this credit line. Should I use it and then pay it down to zero right away, or should I wait until they bill me and then pay it? If I wait until they bill me, should I pay it down to zero, or should I pay something above the minimum payment and let the rest ride? Which method is the most attractive on my credit report? Is the most attractive method also the one that raises my score? –Veronica

ADear Veronica,

As you know, the PayPal Credit system is a convenient way to buy what you want from online retailers that accept PayPal. It gives you, the customer, the choice to pay the balance immediately or incrementally. However, it is not a credit card account, but a virtual payment program. The company does offer a MasterCard credit card, which is a physical card that can be used anywhere — not just on websites — and reports payment activity to the credit bureaus.Ask Erica

PayPal Credit, however, acts differently from traditional credit cards, especially regarding consumer credit reports. In fact, these lines of credit operate on the down-low. When you use the system, the company funds your purchases, but does not send your balance and payment history to TransUnion, Equifax or Experian, as a normal credit card issuer would. Rather, all transactions are in-house. Unless you run up a bill that you don't repay, that is. If you don't satisfy an outstanding bill, eventually it will be sold to a collection agency. Such third-party collectors can and often do notify the credit reporting agencies.

Meanwhile, any positive activity — such as you using the system regularly but paying on time and in full — won't be recorded. A quick check of your reports (available for free from annualcreditreport.com) should reveal that this account is absent from your files. Well, outside of the initial credit check, as PayPal did look into your credit file to see if you qualified, which caused a hard pull or inquiry.

I'm sorry to say that PayPal Credit won't help in your quest to develop a great credit score. FICO and any other scoring systems only tap into the information that is reported on a consumer credit report.

The good news is that if you do miss a payment deadline or two and then get back on track before the account is charged-off, your credit report — and therefore your credit score — won't be negatively affected.

Still it is a good idea to be responsible and keep the balance to zero. If you carry over charges from one month to the next, PayPal will charge interest. The APR is 19.9 percent, which is on the high side. Delete the debt at any point before the due date, though, and no extra fees will be applied.

Because you want to improve your credit score, I suggest obtaining a real credit card.

You can pull your credit score for free from mycreditcards.com to see where you stand. The scale is from 300 to 850. Under 600 is considered bad, 600 to 650 is poor, 650 to 700 is fair, 700 to 750 good, and anything above 750 is excellent. Apply for the best credit card in your class. When you get it, start to charge. Just remember that everything you do with it will appear on your reports and be factored into your scores. Charge only what you can pay off at the end of the month and ALWAYS pay on time. You can ensure your credit score will steadily rise by making timely payments and maintaining little to no debt.

Got a question for Erica? Send her an email.

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