Predatory Lending

The Pros and Cons of Prepaid Cards

By: Charles Clark 

Increasingly, consumers are leaving traditional banking avenues and moving towards alternative sources of money management such as prepaid cards. According to Nilson, “the top 50 largest US Banks and credit union issuers of general purpose prepaid card accounted for $118.09 billion in spending at merchants in 2013.” Additionally, the Mercator Advisory group found that from 2008 to 2012 the amount of money loaded on to general-purpose, reloadable debit cards tripled, rising to $76.7 billion. Mercator estimates that number will rise to $168.4 billion this year.

While prepaid cards seem to be here to stay, there are surprisingly few legal protections available to consumers who use prepaid cards. The Consumer Financial Protection Bureau (“CFPB”) has introduced a proposal that would extend greater protection to consumers who use prepaid cards; however, until new rules are passed (a long and uncertain process) consumers are left to fend for themselves. While there are many dangers associated with using prepaid cards, there can be a number of benefits as well. Below I summarize a few of those benefits and dangers.

Benefits

  • Alternatives to Banks: Prepaid cards present an alternative for consumers who do not have a traditional bank account. Consumers may not use a traditional bank account due to preference, poor credit, or a number of other reasons. Using prepaid cards, consumers without a bank account can do things that require a credit card. Examples include renting a car or booking a hotel room. Additionally, many prepaid cards include account numbers that allow for direct deposit of paychecks.
  • Helps to Manage Money: For consumers without a traditional bank account, paying bills can be a stressful and expensive process that includes paying for and sending out money orders. Prepaid cards can create cost savings by allowing consumers to pay for utility or other bills using their reloadable, prepaid cards.
  • Helps to Develop Budgeting Skills: Finally, prepaid cards allow consumers to develop smart budgeting skills. Loading a specific amount of money onto a prepaid card allows consumers to stick to their budgets and learn where they might be overspending. Additionally, consumers with children can use prepaid cards to start developing their kids’ budgeting habits early. Developing wise budgeting habits is key to financial stability.

Dangers

  • Excessive Fees: Some prepaid card issuers take advantage of consumers by charging fees for seemingly everything. There are examples of prepaid cards that will charge a fee for loading money, withdrawing money, or even to check your card balance. To make sure your prepaid card does not nickel-and-dime you, it is important to do your research before deciding on which prepaid card to use.
  • Limited Consumer Protections: As mentioned before, there are very limited legal protections for users of prepaid cards. The CFPB has proposed potential rules, but as of now consumers using prepaid cards do not have the traditional protections afforded to consumers using traditional banks.
  • Potential Overdraft Fees: Some prepaid cards have a credit feature that allows consumers to spend more than is loaded onto the card. This can result in high overdraft fees, such as those that once plagued the debit card world. Before settling on a prepaid card, consumers must determine whether the card has credit features and charges high overdraft fees.
  • No Loss or Theft Protection: Some prepaid cards will not pay back consumers who have funds stolen or loss due to an error. This can result in innocent consumers losing hard-earned cash by no fault of their own.  Again, one must read the terms applicable to the card — as all cards are not the same.
  • Potential Lack of Insurance: Almost all checking accounts at banks are federally insured up to $250,000. This means if a consumer’s bank ever fails or loses the consumer’s money, the consumer will be protected. Prepaid cards do not come with the same type of protections.

While prepaid cards can offer many benefits to consumers, there are significant dangers that consumers must be aware of. As always, before using a prepaid card do your research and determine which card gives you the best protections. You can find a great resource for finding consumer friendly prepaid cards here.

I have more than one credit score?

By: Laurence Gendelman 

Most consumers have come to understand that their credit scores are important and affect several areas of their life. Credit scores are used by creditors to make lending and credit extension decisions, employers to make employment offers, and much more.

The broad use of your credit scores may not be surprising, but did you know that you have more than one credit score? Do you know how your credit scores are calculated? Do you know which of your creditors or potential creditors are using which scores to determine your eligibility for different loans and products?

A credit score is calculated using the information in a credit file. A credit file typically contains a consumer’s demographics, payment, bankruptcy, legal action, and legal judgment history, debt ratio, longevity of credit history, balanced owned and credit limit on open credit cards, and credit inquiries. http://www.freescore.com/3-credit-bureaus-differences.aspx. Three major private companies, known as credit bureaus, are in the business of maintaining credit files. The three credit bureaus are Experian, Equifax, and TransUnion; each company uses its own proprietary score and scoring method to determine a consumer’s credit risk.

Equifax uses the Equifax Credit Score to rate consumers on a scale from 280 to 850. “Payment history” comprises 35% of the score, including a consumer’s payment history on credit cards and loans, public records and collections including judgments, liens, and bankruptcies, and the number of accounts paid on time. The amount the consumer owes comprises another 30% of their score, including the total amount they own on all accounts, the number of accounts with balances, the percent of the consumer’s total credit line being used, and the size of their credit line. Additionally, another 15% of the score is determined by the length of the consumer’s credit history. 10-12% of the score is based solely on the number of credit accounts in the consumer credit file, recent credit inquiries, and the balance of recently opened accounts. Lastly, 15% of the Equifax Credit Score is based on the types of credit accounts the consumer holds. https://www.equifax.com/personal/education/credit/score/how-is-credit-score-calculated.

Experian uses the PLUS score, ranging from 330 to 830 to determine a consumers’ credit worthiness. Experian does not disclose the PLUS score formula to the public, but the score accounts for roughly the same information as the Equifax Credit Score.

TransUnion produces several consumer scores, most notably the TransRisk score, ranging from 300 to 850. The TransRisk score values the same factors as the PLUS score and Equifax Credit Score, but places more importance on the length of a consumers’ credit history.

Most creditors and lenders do not rely upon one score when deciding to extend credit, rather they look at a consumer’s FICO or Vantage score. FICO and Vantage scores are not educational; rather, they are used to make lending and credit extension decisions. FICO and Vantage scores are calculated using all three of the credit bureau scores; but FICO scores place more importance on the length of credit history while Vantage scores emphasize the most recent credit history. Both FICO and Vantage scores range from 300 to 850. Far more creditors rely upon FICO scores, as opposed to Vantage scores, since their model has been widely used and trusted since 1986. Several other less recognized credit scores are created and maintained by Credit Karma, Credit Optics, Innovis, Credit Sesame, and PRBC.

The reality is that different creditors report consumer information to different credit bureaus. The bureaus are businesses competing for creditors to report consumer behavior to them. The reason they compete is simple: the more accurate the bureau’s credit files are on every consumer, the more business they will likely receive from creditors and lenders. Thus, competition in the private market drives these bureaus to maintain accurate, complete, and thorough consumer credit files.

Since lending and credit decisions are typically made using a FICO score, incorporating the scores from all three bureaus, it is important to know what your credit file looks like at each bureau. The differences in a consumer’s score from each bureau can often range over 40 points based solely upon which creditors are reporting to which bureaus.

For example, let’s say that you get lab work done at a hospital and for whatever reason, the bill for $32 goes to “collections.” The hospital reports to Equifax, as there is no legal requirement to report information to more than one bureau. You apply for an auto loan two years later and the bank pulls your FICO score; your score is a 700. As you shop for cars, you apply for another auto loan at a dealership that uses a lender that only looks at the Equifax Credit Score to make their lending decisions; your Equifax Credit Score is a 610 because you have a “recent collection.” You decide to take the loan from the bank over the dealership’s lender because they are offering an interest rate on the loan that is substantially lower since their lending decision was based on a higher credit score.

The lesson here is to know what your credit file contains at each of the three credit bureaus. One way to do this is to track your FICO score, since it is compiled using information from all three bureaus. Many credit card companies offer this service to cardholders at no additional charge. Additionally www.annualcreditreport.com allows consumers to see their credit files from each of the three bureaus once per year for free. Whatever you do, check your credit scores and check them often.