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Credit score the focus of new celeb-backed debit card

Eileen AJ Connelly

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January 10, 2012|By Eileen AJ Connelly

Suze Ormans card costs $3 to obtain and then just $3 a month, rivaling the… (AP/File )

Suze Orman, the personal finance media personality, is thinking big. She’s the first out of the gate in the fast-growing prepaid debit card market with a card that aims to help its users build a credit score. It is a gamble that could pay off, if it can help create a way to measure the creditworthiness of millions who function outside the traditional financial system.

The latest in a string of celebrities to put their stamp on a prepaid card, Orman will probably avoid the criticism about high fees lobbed at earlier offerings, such as those of hip-hop mogul Russell Simmons and the Kardashians.

Orman’s card costs $3 to obtain and then just $3 a month, rivaling the hugely popular Walmart MoneyCard.

Orman is working with the credit reporting agency TransUnion to create a new kind of credit score for users of The Approved, her prepaid MasterCard - one that’s based on spending habits.

Right now, using debit cards - both the prepaid kind and those tied to bank accounts - does not influence an individual’s credit score, which is calculated with data related to borrowing. If Orman’s experiment succeeds, this new type of score could be a game-changer for the 60 million Americans who do most or all of their business in cash or with prepaid cards.

Orman approached several companies, urging them to develop such a score. TransUnion agreed to gather spending data for 18 to 24 months. It will use that data to try to come up with a formula to predict whether the user is a good risk for lenders.

Banks and other lenders are interested in creating ways to measure how prepaid cards are used because of the huge market they represent. Consumers loaded $70.7 billion onto prepaid cards in 2011, up from $2.7 billion in 2005, according to Mercator Advisory Group.

The problem with traditional credit scores from FICO Inc. and its competitors is that they measure how well individuals keep up with payments, but don’t pay any attention to their overall financial health, Orman said. “Scoring doesn’t question where the money is coming from to make payments.’’

Prepaid cards have filled some of the void for those who don’t use banks. But because they don’t contribute to credit scores, the cards can’t help users get a mortgage, a car loan, or a credit card.

FICO and other companies use data tied to borrowing to determine a score meant to measure the likelihood an individual will pay back future loans.

Orman is adamant that her card will carry only a $3-per-month fee for users who load at least $20 per month onto it. Fees will rise only if the user uses ATMs outside the network it is linked to when withdrawing cash. Consumers who use The Approved card will get daily text messages updating their balance, along with one after each purchase, and other free services like ID theft monitoring, credit monitoring, and free credit reports from TransUnion.