Suze Orman is famous for her personal, easy-to-digest, and friendly personal finance advice. Many of us less famous (far less famous, in the case of this writer) finance writers admire her general approach, which boils down to “spend less than you earn.” Who can argue with that? So imagine my amazement at the news this week that Suze will be offering a branded prepaid debit card.
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Prepaid debit cards have a star-crossed reputation
You know about branded prepaid debit cards, but they're usually not connected with individuals known for their sensible finance advice. Think Russell Simmons. Think the Kardashians. See? Sample words and phrases from our collective wisdom on those topics include “skeptical” and “reprehensible” and “urge to scream” and “hit cash-strapped consumers over the head with nickel-and-dime charges.”
The biggest problems with prepaid debit cards are, really, threefold:
- While they are cards that are available to consumers with bad credit, they don't help consumers build credit, though they are advertised as doing so (any help would be mild at best - the reporting they do is only to smaller credit reporting agencies, not the “big three” that man the velvet rope for most consumer debt in America).
- They're punishingly expensive and seem more directed toward association with the personality branding the card than any financial benefit. Russell's “Rush” Card costs between $4 and $15 upfront, with $10 monthly fees and $1 per-transaction fees.
- They're accused of using celebrities to take advantage of both the hopes and difficult situations of the “unbanked,” mostly-lower-class, often minority consumers whose financial situation is so bad that banks won't take the risk of giving them checking accounts.
Suze Orman wants to make a difference (but, is it a fool's errand?)
Orman has a different idea. She, too, wants to convince the unbanked to use her prepaid debit card, but she wants to charge less. Her “Approved Card” is far cheaper than Rush or the K thingy - only $3 to purchase the card and a $3 monthly fee. ATM transactions from the Allpoint network (found in 7-Eleven, Costco, Kroger, CVS, and Walgreens) are $2 per withdrawal, and point of sale transactions, such as purchases at the grocery store or coffee shop or online, are free. Balance inquiries and some declined transactions are $1 , but it's free to be declined at the register for a regular PIN/signature transaction. Many of these transactions, especially ATM withdrawals, are free for 30 days with a direct deposit or bank transfer into the Approved Card account, making them a great product for customers with some sort of automatically-deposited income (even, for instance, unemployment).
Notably, electronic debit bill paying is free. Many competing products charge for this service, from $1 to $3 per transaction, and it's the service that customers without a regular bank account need. Often, discounts and special deals are available to customers who allow vendors to debit their account each month.
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The great credit score kerfuffle
The concept that sells many prepaid debit cards - the quasi-justification for how expensive they are - is that they might help in the quest to raise a credit score. If a credit score is low enough so that a mainstream bank isn't part of your personal finance portfolio, can a prepaid debit card even help? Probably not.
The problem that Suze Orman has mentioned in public statements about the Approved Card is that credit bureaus, beyond even knowing about the transactions made by the millions of unbanked consumers, don't care about sensible use of money. They just care about sensible use of credit. A New York Times piece quotes Orman as saying, “There is something radically wrong here. We are rewarding people for having credit and punishing people who pay in cash. I want to change that paradigm.”
Wanting to change credit score calculation is easy. Changing is hard.
Orman has done the near-impossible and convinced TransUnion, one of the big three credit bureaus, to collect the data about spending habits from her customers. But what that will do to credit scores is another thing entirely. The answer, probably, is nothing.
The problem is that TransUnion has only been persuaded to evaluate the data Orman will collect with her Approved Card; it has not promised to include that in credit reports nor in the calculation of scores. If, after two years, it finds the data meaningful, it's still unlikely to have much of an effect on the resultant calculations. Responsible use of a prepaid debit card, after all, hasn't had much impact on the financial institutions that sponsor the card - in this case, Orman's own company - so the patterns of data don't have much meaning.
What kind of debit card use could demonstrate the sort of behavior creditors want to see, such as:
- On-time delivery of minimum payments
- A history of purchasing high-value assets and then paying them off quickly
- Regular income and a comfortable ratio of debt-to-income
These all can be shown far more reliably through existing reporting. A consumer who pays rent on time each month in cash won't differ, to the eyes of TransUnion, from a consumer who pays rent on time each month by automatic debit from her Approved Card. Similarly, failing to overdraw an Approved Card account (that is impossible to overdraw from, except perhaps for a few $1/$2 ATM transaction declined fees) is very different from failing to overdraw a bank account.
Why would you use a prepaid debit card?
There are two groups of people I can see benefiting from using a prepaid debit card, as well as one group I would caution to avoid it. All of them could achieve higher credit scores, but not in the way you think. Let me explain.
- Those who have very bad credit, especially with recent negative experiences with bank accounts, should use a prepaid debit card. My sister-in-law still owes money to one (or maybe two) financial institutions, after having had several subsequent overdraft fees and never having the several hundred dollars to pay it off and get back the ability to use her account. This is a very common situation, thanks to the unreasonably large fees most banks charge per overdraft (you've never been nauseous like the nausea from a few $35 fees for $4 and $5 transactions - or an overdraft fee of $35 for a $30 check).Even the recent consumer protection limits don't prevent people from getting in these situations (or being in them already), and those consumers may as well use prepaid debit cards, as it won't be easy to do business with a bank until you pay off those old debts.
- Those who have had overdrafts recently and who are, or expect to be, living paycheck-to-paycheck for the foreseeable future, should use a prepaid debit card. I know how my sister feels, as I've been in exactly the place she is now; husband with scattered temporary work and scattered temporary work herself, juggling a baby and a pile full of student loans. It may be that they have plenty of money to pay the rent. Or, they could be scrambling come February 5. And March 5, and April 5, etc., etc.It makes more sense for people like them to use prepaid debit cards precisely because you can't get into those nasty credit-killing messes. With a bank account, you're either tempted to write a check on the 5th and hope you can deposit something on the 6th to cover it; or you're bracing for the automatically debiting phone bill that you just discovered you won't be able to cover. Using a prepaid debit card won't positively impact your credit score, but it will keep you from doing things to worsen it (and could, if you're like me, save you lots of those stupid fees so you can afford to pay your minimum debt payments).
- Those who need to increase their credit score fast should not use prepaid debit cards. The best thing you can do to increase your credit score is to use credit. Debit cards are not going to help with this one bit! Most especially these prepaid ones, with reporting almost nil and information only theoretically useful (even to those who preach using cash like it's divine salvation). Prepaid debit cards will tie up cash that could be used to get a prepaid credit card, or to pay your mortgage on time, or the minimum payment on an installment loan - you get the picture.
About those credit scores…
One last word of admonishment about focusing one's financial life to better one's credit score: I think this is largely baloney. You're far better off arranging your financial life around living more frugally, paying off debt that you do have, and finding ways to avoid incurring new debt - say, buying a beater car until you can afford to save up for a nicer one, or renting a low-cost apartment until you can save up a very large down payment for a house. Ideally, you would be living in a way that makes credit scores worthless.
Naturally, we're not all living in this paradise. There are very valid reasons to hope for a great credit score, not least of which is that many jobs include a credit check sometime between interview and first paycheck. I get that sometimes you need a good credit score (especially if you want to buy a home). But if you're like me, and already have both a mortgage and reliable transportation (a fancy bike, in my case) and don't see applying for a job in your immediate future, just work to improve your financial situation. If this means signing up for Suze's debit card, you have my blessing.