This is the final article in a three part series about credit builder features and prepaid debit cards. In the previous two articles, the author discusses problems with existing credit reporting features for prepaid debit products. In this article, the author describes a new prepaid debit card credit building feature that will be launched this year.
As of this moment, there are unfortunately no prepaid debit cards in circulation that report recurring monthly payments to the three major bureaus. Nor, can any prepaid debit cards impact your credit score reported by any of the three major bureaus.
That’s unfortunate, because the perception among many consumers is that some prepaid cards already do that. In fact, as mentioned in the first article of this series (“Debunking Myths of Building Credit With Debit Cards“), research shows that 25% of existing general purpose reloadable prepaid debit cards currently believe that the card they own already does impact their credit score. Despite that commonly held perception, they don’t. None of them do.
This will soon change.
Several prepaid debit card issuers and processors have committed to a new feature that will take recurring monthly payments made on their billpay platform, and report them to the three major bureaus, Equifax, TransUnion and Experian.
The way it works is fairly straightforward. These recurring monthly payments (anything with a regular monthly billing cycle, such as rent, car insurance, cell phone bill, utility payments, etc.) are reported as trade lines on each of the three bureaus.
If a cardholder makes their payments regularly each month, it will move that individual’s credit score up. If they miss payments, it will move that individual’s score down. Up or down, based on actual consumer behavior. That is the way it’s supposed to work, because credit scores go both ways, right?
In a conversation with an analyst at one of the three major bureaus, he indicated that the type of person that would have their score impacted the greatest would be someone with a thin-file or no-file – very little history that had been previously reported. Those individuals would see a significant rise in their three-bureau score, assuming that they paid their bills each month.
We have identified three major population segments that would impacted by this credit score enhancement to prepaid debit cards.
First, are the young adults, ages 18 to 24, who are just starting out their economic lives post-high school or post-college. They’ve now been largely frozen out of the credit card market by the CARD Act, but with this new feature, they will have an alternative for establishing their credit score without going into debt.
There are an estimated 36 million young adults in this age group who can benefit immediately from this feature, when overlaid on a prepaid debit card.
Second, recent immigrants from any of more than 140 nations, here to work in occupations ranging from medicine to technology, agriculture, energy, hospitality and more. These documented immigrants who are here to work, have the same difficulty establishing their initial credit, regardless of their occupation or wage scale.
A prepaid card carrying this reporting feature will be a boon to some 14 million first-generation immigrants.
Third, and to a lesser degree of impact, are the millions of Americans who have had their credit score compromised due to what has become known as The Great Recession of 2008-2009.
That two-year period saw the greatest decline in aggregate credit score in U.S. history.
As these millions of people who have lost their jobs, had their hours cut, seen their small businesses impacted, or have had their credit card lines of credit unceremoniously cut, or inactive card accounts arbitrarily closed, they are actively seeking ways to improve their credit scores…without acquiring more debt.
Will this segment see as great as an impact as those who are starting out from scratch? No, because the impact will be watered down by what can be an existing or lengthy credit history. But paying their bills each month on a prepaid debit card’s billpay feature will still have a positive impact on their credit score. Just to a lesser extent.
You can expect to see the first of these cards with this feature emerging in the Second Quarter of 2010.
What you should look for to understand if it is a card that can truly impact your credit score is:
1. Look for your regular monthly payments that get reported from your card’s online Billpay service to the three major bureaus, (by name)…Experian, TransUnion, Equifax.
2. Look for a statement that says that making these payments will actually impact your credit score from the three major bureaus…not some “alternative” agency or bureau.
That’s it. If it doesn’t fit that simple test, it might not be what you’re looking for. Interestingly, this is the solution that many in the prepaid debit card industry have been looking for, for several years.
Rumor has it that they’re still looking for Sasquatch and the Holy Grail.
Coming Up Next In This Series:
- Part One: Separating the Misconceptions of Credit Scores
- Part Two: The impact of the New Credit CARD Act on Young Adults
- Part Three: New Credit Builder Feature Coming – What to Expect When it Arrives
This is a guest article by Mr. Tom Britz, CEO of PanAm Payment Systems, Inc. Over the past 22 years, Tom earned a reputation as a nationally respected card payments program consultant, with many dozens of clients spanning numerous industries. Tom has also volunteered on numerous industry & community boards throughout his career. Tom is extremely well connected in the card payments industry, and has worked with about every affinity or co-branded credit card issuer in the USA at one time or another over the past two decades. He also has worked in business development in international remittances for six years, and has experience developing successful affinity and co-brand programs for alternative products, including telecommunications. Tom previously spent 12 years as a ski industry marketer in Upper Michigan & Colorado. He is based in Whitefish, Montana. You can contact Tom at tbritz AT centurytel.net.