The proliferation of prepaid cards is only one symptom of a greater problem – more and more people don`t have a bank. The so-called “underbanked” population is made of people who can`t get a credit card, can`t open a bank account, and have poor or non-existent credit history.
If you don`t have a bank account, how do you cash your paycheck? The answer is the often predatory world of payday lending and check cashing businesses, who charge exorbitant fees to customers who may not feel they have any choice but to use these services to get cash.
Financial researcher Marc DeCastro says, “I’m absolutely amazed at the unbelievably high rates people are paying to have their checks cashed. And they are doing it repeatedly, month after month.”
Good News for the Underbanked
The good news is, more and more banks are partnering with technological firms to analyze prepaid card data. Prepaid cards are often used by unbanked consumers, and finding out who is using them and why can help banks figure out who might be a good credit risk, and who isn`t. By tracking transactions and looking at payment histories, banks may be able to offer credit cards to consumers they wouldn`t traditionally think of.
American Express has a new program called “Make Your Move,” which runs just such an analysis on customers of their prepaid cards. After tracking their transactions for six months, American Express will invite selected prepaid card members to apply for an American Express prepaid card, which will then enable them to build a credit history.
Leah Gerstler, a vice president at American Express, says, “his will help someone build a financial track record… which will help them down the road if they are looking to buy a home or get another loan. There are so many times when having a credit history is important. This product to some degree can bridge that gap for those who don’t have a credit file or who have a very thin credit file.”
The Make Your Move program includes consumer education, such as giving customers advice about using their card and budgeting for bills, groceries, and other expenses.
In most cases, the people targeted by the card firm for the program don`t have a substantial track record that could be used by a bank to issue credit. The program also includes tips about how to use the prepaid card for groceries, gas, mobile phone bills or other recurring payments to build a solid credit record.
Giving Customers a Fair Chance
Programs like these are vital for people who need to repair their credit, and the fewer underbanked people we have in this country, the better. Researcher DeCastro says of these types of analytics and programs, “you can look at the stored value card and see how people keep a balance on it, and when money comes in and out. You can see if they are spending it at the dog track or if they are buying gas.”
Although some may feel that tracking such information is a violation of consumer privacy, it does help banks to know how much risk they will be taking on if they choose to offer a credit card to a certain consumer. If banks are going to help more people get credit cards, they need to make sure those people are good credit risks – a nation of defaulters won`t be any better than an underbanked nation.
Education is the Key
At Credit-Land, we offer everything from prepaid cards to credit cards for people with fair to excellent credit history. We also strive to offer articles that educate consumers about responsible use of credit. Check out our extensive education section to find articles about everything from budgeting to protecting yourself from identity theft.