Published January 19, 2012
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.
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:
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.
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:
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.
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.
The original article can be found at GetRichSlowly.org:
Does Suze Orman's Prepaid Debit Card Make Sense for You?