Consumers increasingly want to know if their debit-based financial products have any sort of bearing on their credit scores, and the short answers to the above questions are “No” and “No.”
But it’s understandable that many consumers are confused about this issue, given the Great Recession’s devastating impact on consumer credit, the emphasis currently being placed on financial literacy, and the mainstream adoption of new financial products, like prepaid cards. Card issuers have also made an unfortunate habit out of using the words “prepaid,” “debit,” and “credit” almost interchangeably in their marketing materials, further intensifying consumer confusion.
“The idea of credit carries a particular set of expectations and if the offered ‘credit’ products do not meet that expectation, consumers may be confused,” says Breagin K. Riley, assistant professor of marketing in Syracuse University’s Whitman School of Management. “However, I suspect this becomes apparent after the card has already been adopted – when it’s too late, not beforehand.”
No Credit for Debit?
Neither prepaid cards nor debit cards report usage information to the major credit bureaus, which means they 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 the 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 we have open, how long we’ve had them, how much of our available funds we actually spend, and our history making payments on those accounts. When you consider that prepaid/debit card use entails loading and spending your own money, it’s obvious they don’t quite fit the equation.
Sure, you can use a prepaid card or a debit card to pay monthly bills for utilities, cell phone service, etc. – which one could argue are being extended to you as credit since you pay later for something you get now. Heck, you can even choose a “credit” option when paying with a debit card at the point of sale. But isn’t it perhaps more appropriate to ask why issuers don’t themselves report billing and payment data to the major credit bureaus on a monthly basis? You can’t tell whether a payment is made on time or for the full amount owed just by looking at prepaid and debit 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 use the term “prepaid credit card” in order to make consumers feel more comfortable with an otherwise foreign-seeming financial product as well as to 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.
That’s a problem, according to Chris Kowal, director of the Center for Professional Selling at Purdue University, because “marketing campaigns or wording that confuse the meaning of the credit process may lead consumers to make counter –productive decisions and unfortunately further damage consumer trust.”
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 by 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 CardHub. “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.”
Immediate Implications for Consumers
You clearly can’t count on your prepaid card or debit card influencing your credit standing anytime soon. It simply does not make sense, and while certain peripheral credit bureaus may at some point decide to include usage data from such accounts 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.