That’s an increasingly popular question among consumers, as more and more people are introduced to them as a result of legislative dominoes falling, mega-star endorsers like Suze Orman and Magic Johnson attracting their followers, and the seeds of a long-budding market finally coming to bloom. After all, the majority of consumers still refer to these products as “prepaid credit cards,” implying a relationship between prepaid products and credit standing, and we often hear from people asking about why their prepaid payment history can’t be found in their credit reports.
So, what’s the verdict?
The short answer is no. Prepaid cards don’t report to the major credit bureaus and therefore have absolutely no impact on your credit standing. That’s only logical, after all. While credit scores are increasingly thought of as indicators of overall responsibility given their use by employers, landlords, and other decision makers outside of lending community, they’re actually numerical manifestations of how trustworthy we are with other people’s money. They take into account the types of credit card, loan, and investment accounts you have open, how long you’ve had them, how much of your available funds you actually spend, and your history making payments on those accounts. When you consider that prepaid card use entails loading and spending your own money, it’s obvious they don’t quite fit into the equation.
Sure, you can use a prepaid card to pay monthly bills for utilities, cell phone service, etc., which one could argue are being extended to you as credit in that you pay later for something you get now. But isn’t it perhaps more appropriate to ask why those companies don’t report on a monthly basis their billing and payment data to the bureaus themselves? You can’t tell whether a payment is on time or for the full amount owed just by looking at prepaid card transactions.
Foundation for the Future?
Still, there’s more to the story, as you might have guessed by now. Not only do prepaid card marketers actually promote use of the term “prepaid credit card” in order to make consumers feel more comfortable using an otherwise foreign-seeming type of financial product as well as foster the assumption that prepaid cards provide more utility than they really do, but there have also been efforts over the years to include prepaid card data in credit scoring models. Most recently, Suze Orman advertised an experimental agreement with TransUnion to gauge the efficacy of including prepaid card data in credit reports. While the practice was purely exploratory, Orman’s marketing copy and cable-news spiel led many consumers to believe that her card would indeed help them build or repair their credit.
Orman, believe it or not, wasn’t the first one to ponder adding prepaid cards to credit reports. She wasn’t even the first celebrity. RushCard, the prepaid card company founded my music mogul turned overall business baron Russell Simmons, struck a partnership in 2003 with the credit bureau PRBC, creating a program known as Rush Path to Credit. PRBC differs from the big three credit bureaus (i.e. Experian, Equifax, and TransUnion) in that consumers can self-enroll and have non-traditional bill payments – such as those from rent and utility bills – included in their files.
“As part of the relationship, regular bill payments made with the card would be reported to PRBC. Though this wasn’t the end-all solution for cardholders who want to build their credit profiles, it was a start,” RushCard CEO Rob Rosenblatt told Card Hub via e-mail. “Some lenders that use PRBC data as an additional data source to augment their credit-granting decisions include Ford Motor Credit, Dell, mortgage companies Fannie Mae and Freddie Mac, along with furniture and jewelry stores and used-car dealerships.”
Despite the fact that the RushCard website still advertises a Transaction Reporting Service that relays bill payment information to “participating consumer credit reporting agencies,” the company stopped accepting new cardholders into its credit reporting program in 2011. Perhaps this has something to do with a deal that’s currently in the works.
“RushCard does not currently work with any of the primary credit reporting agencies; however, we are in discussions with one of them and hope to be working together in the near future,” Rosenblatt told Card Hub. “Credit reporting linked to prepaid cards is still an experiment, and to date is unproven– it’s very important to realize that this is a work in progress, industry wide. We believe that the potential opportunity to build credit through the demonstration of consistent and timely payments (e.g rent, utility bills, automotive and other leases, etc.) is very important to our customers, and we would like to help our customers by advancing the evaluation of prepaid payments history as a credit building input.”
So, what does this mean for consumers now?
Well, you can’t count on your prepaid card influencing your credit standing anytime soon. It simply does not make sense, and while certain peripheral credit bureaus may decide to include prepaid card data down the road in order to differentiate themselves, the big three will likely be more wary and will probably only do so if the big banks request it. The most efficient credit building tool for consumers therefore remains a credit card, particularly since anyone can get approved for a secured card these days no matter how bad their credit may be. Whether you make purchases and on-time monthly payments or simply lock your card in a drawer, information will be relayed to the major credit bureaus each month, allowing you to see tangible credit score gains within about a year.
