Several observers last year predicted credit-building features might be the next significant add-on for general-purpose reloadable prepaid cards. Last week, a Las Vegas-based technology company unveiled a credit-score feature that reports recurring monthly payments initiated with prepaid cards such as utility bills to the three major credit bureaus and that can affect a cardholder’s credit score.
PanAm Payment Systems Inc. is helping Paragon Dynamix LLC bring the credit-building tool to the market. The Prepaid Group International, an Atlanta-based prepaid card manager, is one of the first companies to use the feature for its payroll cards.
The tool’s ability to report to the major credit bureaus (Equifax Inc., Experian PLC and TransUnion LLC) is “a significant step in the right direction” for the prepaid card industry, says Rachel Schneider, innovation director for the Center for Financial Services Innovation, a nonprofit arm of Chicago’s ShoreBank Corp.
“There are millions of thin-[credit] file and no-[credit] file consumers who don’t have traditional credit histories,” she says. “There is substantial evidence to indicate that regular bill-pay activity is relevant to assessing credit worthiness.”
Paragon did not develop the system on its own but declined to reveal its partner. The tool can help program managers, processors and issuers create additional customer “stickiness” in their prepaid programs, according to president Philip Huston. “[That] impacts long-term portfolio profitability,” he says.
College students and first-generation immigrants most likely would benefit the most from reloadable prepaid cards with this feature, says Tom Britz, president and CEO of Whitefish, Mo.-based PanAm.
The Credit Card Accountability, Responsibility and Disclosure Act has made it difficult for consumers under 21 to secure a credit card. Obtaining a co-signer for the card is one option, but Britz contends most college students do not want one because they fail to build a credit file that way.
First-generation immigrants represent a market that extends beyond the traditional Hispanic unbanked and underbanked population, Britz says. “We’re talking about people from more than 140 different countries and who work in a lot of different industries,” he says.
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 says.
How much the tool will affect scores, however, remains to be seen. “That’s the million-dollar question,” Schneider says. “It’s in the credit bureau’s court to figure out how much to use this information.”
PaymentSource contacted all three credit bureaus, but none returned calls by deadline.
Consumers who pay recurring monthly bills with a prepaid card can show creditors “willingness to pay,” Schneider says. “And demonstrating consistent bill-pay performance over time indicates a strong willingness to pay,” she adds.
Recurring monthly payments also demonstrate a consumer has the necessary cash flow to pay bills over time, Schneider says. “That can be helpful [to creditors] in determining what amount of credit they would be able to manage successfully,” she says.
Only one other prepaid card apparently features a credit-building feature. In 2008, Cincinnati-based UniRush LLC added an option to its prepaid RushCard and Baby Phat card to enable 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 based in Annapolis, Md., compiles payment histories for cardholders who choose to use the credit-reporting service.
However, Pay Rent does not report to the three major credit-reporting bureaus. So the initiative would only help organizations that subscribe to its service.
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