A Las Vegas company called Paragon Dynamix LLC has developed a system that can help people build a credit history by reporting recurring monthly payments initiated with general-purpose reloadable cards to the three major credit bureaus.
The system's link to Equifax Inc., Experian PLC and TransUnion LLC is "a significant step in the right direction" for the prepaid card industry, said Rachel Schneider, the innovation director for the Center for Financial Services Innovation, a nonprofit affiliate of ShoreBank Corp. in Chicago.
"There are millions" of thin-credit-file and no-credit-file consumers "who don't have traditional credit histories," 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 "impacts long-term portfolio profitability." Paragon, which announced the system last week, developed the technology with a partner that Huston declined to name.
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 Credit Card Accountability, Responsibility and Disclosure Act has made it difficult for people under 21 to secure a credit card.
Obtaining a co-signer for a card is one option, but Britz said that holds little appeal to college students because using such cards does not help them build a credit history.
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.
How the tool will affect scores remains to be seen. "That's the million-dollar question," Schneider said. "It's in the credit bureaus' court to figure out how much to use this information."
Spokespeople for all of the three credit bureaus did not return calls.
Consumers who pay recurring monthly bills with a prepaid card can show creditors a "willingness to pay," Schneider said. "And demonstrating consistent bill-pay performance over time indicates a strong willingness to pay," she said.
Recurring monthly payments also demonstrate a consumer has an ongoing cash flow, Schneider said. "That can be helpful [to creditors] in determining what amount of credit they would be able to manage successfully," she said.
At least one other prepaid card offers a credit-building feature.
UniRush LLC added an option in 2008 to its prepaid RushCard and Baby Phat cards that enables cardholders to build credit histories based on their ability to show they can pay bills on time.
Pay Rent Build Credit Inc., an alternative credit-scoring company in Annapolis, Md., compiles payment histories for UniRush cardholders who use the credit-reporting service.
PRBC's service develops a credit history for consumers based on payments that the major credit bureaus do not always evaluate, such as rent and utility payments. Observers have said its model will benefit people with little background as borrowers, but the company does not report its data to the major credit bureaus.
