8/20/2012 2:15 PM ET|
Why Suze's card won't help you
A new prepaid debit card is being offered by Suze Orman in an attempt to change credit scoring, but don't count on that. You can improve your credit in other ways.
The biggest problem with building better mousetraps is that there's really no demand for better mousetraps. The ones we have work well enough.
That's been the sticking point with credit scoring as well. Lenders are pretty much content with the way scoring systems work. So proposals to expand credit scoring to people who don't have credit haven't really gone anywhere, at least not yet.
You need to keep this in mind when it comes to the Approved Card, the new prepaid debit card from money guru Suze Orman. Some of the media coverage of the card, which was announced last week, might give you the impression that the card could help you build or improve your credit history. Orman herself said, in a Twitter message to her followers, that she was "trying to change credit scoring with this card."
That may be a long way off, if it ever happens.
Right now, your credit scores are based on the information in your credit reports. To have credit scores, you must have credit accounts. To have good scores, you must use those accounts and do so responsibly -- paying them on time and not using too much of your available credit.
Your scores typically aren't affected when you use debit cards, whether they're the kind that link to your checking account or the prepaid kind that you can fill up with cash or a direct paycheck deposit.
Orman wants to change that. She made a deal to share spending data from the cards with TransUnion, one of the big three credit bureaus. TransUnion promised to study the spending data see if it could be used to predict whether someone is a good credit risk. Orman argues that people who use cash or cash equivalents should be rewarded for their prudence, rather than being punished in the credit-scoring world because they don't use credit accounts.
It's a worthy goal, perhaps, but TransUnion isn't including the data in the credit reports it sells to lenders or promising that it ever will. Even if TransUnion does someday incorporate Approved Card data, the two other bureaus -- and the creator of the leading credit-scoring formula, the FICO -- certainly aren't on board.
"The research that TransUnion is doing regarding the Suze card seems to be missing one key component, (which is) involvement by FICO," said credit-scoring expert John Ulzheimer, the president of consumer education at SmartCredit.com. "TransUnion -- and Equifax and Experian -- don't have any influence over what counts, what doesn't count and how much things count in your FICO score."
And it's the FICO score, developed by Fair Isaac Corp., that really matters. There are other scoring systems, such as the VantageScore that's sold by all three bureaus and the "consumer education scores" the bureaus sell or give to consumers. But the FICO is the one that's used by most lenders. It's the score that credit card issuers typically check before giving you plastic, that auto dealers usually pull when you go to buy a car and that mortgage lenders most often use when they decide whether to give you a home loan. The fact that you may have other scores doesn't matter much if your lender is looking only at your FICOs.
This isn't the first time we've heard about efforts to use "alternative data" to assess credit risk. Experian loudly announced last year that it would include rental payment information from a number of big landlords in its credit files. But the rental information isn't incorporated into the FICO formula.
FICO itself has tried to expand into the universe of people who don't use credit. Its so-called Expansion score uses a variety of "nontraditional credit data," such as bank records, cellphone and land-line account data, and membership club records, to create scores for people whose credit files are thin or nonexistent.
It's a huge group of people -- upward of 50 million, by some estimates. As the economy improves, lenders may be more willing to experiment with extending credit to the creditless, but right now they don't seem all that eager to fish in this particular pool.
So if you want to improve your credit, the way to do so is not by using a prepaid debit card. Instead, you should have and lightly use a credit card or two, paying your balances in full every month. If you don't have a regular, unsecured card and your credit scores are bad or nonexistent, you can use a secured card to start rehabilitating your credit. (NerdWallet recommends the Orchard Bank and Capital One secured cards. See the recommendations here.)
Orman's card isn't a bad one, as prepaid cards go. The fees are lower than those at many of its competitors, and the card comes with some extras, such as free credit monitoring of your TransUnion credit files for the first year. (You don't need the Approved Card to get free access to your files, though. Credit Karma also offers free monitoring of your TransUnion files, and you can get a once-yearly look at each of the three credit bureau files on you via AnnualCreditReport.com.)
The question remains whether you should use a prepaid card at all. Credit cards and debit cards attached to checking accounts offer far more consumer protections. If you don't have a bank account -- and many people use prepaid cards because they don't -- you should investigate opening a free checking account from a credit union or community bank. These accounts still exist, and they're usually a better deal than paying prepaid-card fees.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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