By: Will Hernandez
March 30, 2010
People can use prepaid cards to help build a credit history, thanks to a new system being welcomed by advocates for the underbanked.
The system is "a significant step in the right direction" for the prepaid card industry, said Rachel Schneider, the innovation director at the Center for Financial Services Innovation, a nonprofit affiliate of ShoreBank Corp. in Chicago.
Millions of consumers don't have a traditional credit history, Schneider said. "There is substantial evidence to indicate that regular bill-pay activity is relevant to assessing creditworthiness."
Philip Huston, Paragon's president, said its system can help prepaid card companies, processors and issuers increase customer "stickiness" and improve profitability.
Prepaid cards now offer various features more commonly seen with bank accounts, including linked savings accounts that earn interest, online bill-pay services and lines of credit, and industry watchers have said that credit-building features might be the next major add-on for general-purpose reloadable prepaid cards.
PanAm Payment Systems Inc., which helps prepaid card companies develop new products, is helping Paragon market the credit-building tool. Prepaid Group International of Atlanta is using the system in conjunction with a payroll card.
College students and immigrants likely would benefit the most from reloadable prepaid cards with this feature, said Tom Britz, PanAm's president and chief executive.
The immigrant market extends beyond the traditional Hispanic unbanked and underbanked population, Britz said. "We're talking about people from more than 140 different countries and who work in a lot of different industries," he said.
The credit-score enhancement feature also might benefit consumers who had their credit compromised during the recession. "It won't move the needle as much for those consumers, but it will help," Britz said.
But how the tool will affect scores remains to be seen, because much will depend on what Equifax Inc., Experian PLC and TransUnion LLC do with the information they receive. "That's the million-dollar question," Schneider said. "It's in the credit bureaus' court to figure out how much to use this information."