As many PerkStreeters know, using a credit card can often be a one-way ticket to incomprehensible debt and, in turn, a plummeting credit score. The caveat here is that many people also hang on to their credit cards solely to build credit.
A debit card, on the other hand, helps you live within your means by ensuring you’re spending only money you have in the bank. But can it also be used to improve your credit score? Not yet. Suze Orman, one of PerkStreeters’ favorite financial adviser’s, is looking to change that.
The Approved Card
Orman, who you might know for her various financial publications or for her show on CNBC, has taken a step directly into the financial services industry by announcing her very own prepaid debit card to kick off the 2012 calendar year: “The Approved Card.” And while her primary goal is to help people get out of debt by choosing to use debit instead of credit — a goal we echo here at PerkStreet — the card may actually help consumers fix their credit scores over time, at least with one of the reporting bureaus, effectively changing the rules and making debit cards even better.
Another Celebrity Prepaid Card?
I know what you’re thinking. Prepaid cards have a rep for being a pretty raw deal when it comes to fees — especially when compared to PerkStreet’s unlimited rewards. And prepaid cards branded by celebrities have and even worse track record. Remember the Kardashian Kard? (It was canceled almost immediately because it presented such a raw deal.) The rapper Lil’ Wayne recently launched another prepaid card called the Young Money Card. (Where do I sign up for that? Not. Wow.) But Orman is a financial expert, so perhaps this will be different? Time will tell.
Why This MIGHT Lead to Debit Cards that Build Credit
By partnering with TransUnion, one the three largest credit bureaus in the US, users of the Approved Card will have a year of free, unlimited access to their credit score and credit report. Additionally, TransUnion has agreed to collect data from Orman’s customers, evaluating spending habits in an effort to find a way for them to impact their scores. If that goes well, and TransUnion changes the way they calculate credit scores, the other major bureaus could potentially follow suit.
The Federal Trade Commission has mandated that everyone have access to a truly free credit report every year via the site AnnualCreditReport.com, but this partnership between Orman and TransUnion is more robust.
According to The New York Times, Orman said, “We are rewarding people for having credit and punishing people who pay in cash. I want to change that paradigm.” Even if the data collected by TransUnion reveals significant improvements in spending, The Times doubts it would have a significant effect on individuals’ credit scores.
Why We Like the Idea of Debit Cards that Build Credit
Debit cards that help you build credit are an interesting idea. At PerkStreet, we don’t run a credit check on new customers because we don’t see a poor credit rating as an indication of a poor customer. The problem with credit is systemic, not individual; if you’ve suffered at its expense, we welcome the decision to use debit and make smart financial decisions. If we could find a way to get responsible debit card use to help people with their credit scores, we would do it in a second.
Why shouldn’t your responsible decisions be reflected on your credit score? We’ll see what happens with Orman’s card; the road for prepaid debit cards is often a rocky one. The Times reports the venture may cost Orman tens of millions of dollars of her own money before becoming self-sustaining.
But if the card succeeds and TransUnion decides to notch up scores in response to positive spending trends, it will be one more reason to save loans and credit for your purchasing a home and the worst-case emergency scenario (unless you’ve already saved your emergency fund), and do the rest of your spending with a trusted, safe debit card.
Time Will Tell
Whether you prefer a prepaid debit card like Orman’s or a cash-back debit card with a linked checking account like that from PerkStreet, you’ll only ever accumulate wealth by spending (and saving) your own money.
It will be interesting to see what long-term effects the card’s success may have. But hopefully, in the hands of a trusted financial adviser, if Orman maintains lower rates and consumers aren’t put off by the Approved Card’s fees, the prepaid debit card could change a damaged part of our financial system.
Should debit card spending positively (and, conversely, negatively) impact your credit score? How do you think that would or should work? Meet us in the comments section below and share your thoughts.