Prepaid debit cards have been all over the consumer finance news for the past year. They are becoming a more popular choice for consumers who don’t want or can’t get credit cards or traditional bank accounts. The prepaid industry would like you to believe consumers are choosing prepaid debit cards over credit cards and debit cards because they’re a better value. I firmly believe, however, that many people who choose prepaid debit cards, which are normally loaded with fees, are doing so because their credit is poor and don’t have lower priced options like debit cards from checking accounts at banks and credit unions.
Don’t get me wrong, not all of the prepaid options are bad and they can be a perfectly reasonable solution for some consumers. American Express recently announced the release of their prepaid debit card called the Bluebird Card, which has been marketed very clearly and has but one fee, an ATM fee if you use an ATM more than once per month.
Further, the marketing of these cards can be downright deceptive and misleading. I’ve been talking to groups about the pros and cons of prepaid debit cards for well over a year and can tell you from personal experience that many consumers are confused about them and their benefits. I’ve had countless conversations dispelling the myth that prepaid debit cards have credit building benefits. Heck, even the Public Relations person from the Network Branded Prepaid Card Association tried to convince me that some of them have credit building benefits, which they do not. And if you don’t believe me then maybe you’ll believe the Federal Reserve…
“In addition, these cards (prepaid debit cards) presently offer no credit-building benefits to consumers who may lack sufficient credit histories. Despite appeals from prepaid card companies, the credit bureaus have been reluctant to create standard data reporting formats for “noncredit” transactions?”
I believe prepaid card issuers would love to be able to say, honestly, that prepaid debit cards ARE reported to the credit bureaus, have credit building and rebuilding benefits and can help to improve your credit scores. And who knows, maybe someday the credit bureaus will accept the reporting of prepaid debit cards and all of that will be true. I just don’t see that happening because prepaid debit isn’t an extension of credit and a credit report is, well, a CREDIT report.
If prepaid debit cards were eventually reported I’m not even sure how they’d be reported. Trade lines on credit reports have opened dates, credit limits, balances, late payment history, and historical high balances. Prepaid debit cards have none of those things. If prepaid debit cards were ever allowed to be reported to the credit bureaus then traditional debit cards (those connected to a checking account) and gift cards should also be reported since they’re all similar products.
Credit Scores and Prepaid Debit
I don’t believe prepaid debit cards or the usage of those cards is predictive of elevated credit risk. They have none of the traditional attributes of truly predictive credit information. There are no due dates, there are no late payments, there are no defaults, you can’t include a prepaid debit card in a bankruptcy, you can’t exceed you credit limit because there is no credit limit, there’s simply nothing, other than the shape of the card, that suggests it’s similar to a true credit product.
When you “get” a prepaid debit card you’re simply buying it from a drug store or some other location. You’re not applying for it, you don’t get “Approved” or denied, your credit reports don’t get pulled, you don’t fill out an application, and there is no underwriting. In fact, try something for me…go to the mall and buy a gift card for someone for Christmas. That’s basically the same process as you’d go through when you “get” a prepaid debit card.
That’s why your prepaid debit card isn’t on your credit reports.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.