Our editorial team recently spoke with Beth Robertson, who studies prepaid debit cards for Javelin Strategy and Research. Robertson and her team have studied how thousands of Americans use their debit cards, and why. Robertson's research shows that many frequent debit card users prefer the convenience of loading up their accounts at retail stores instead of using traditional bank branches. Without a credit card, debit cards become crucial to shop online, to travel, and to pay many routine bills.
However, debit cards don't yet have a way to influence your credit score or your credit report. Suze Orman and Russell Simmons, backers of two major consumer debit card programs, have both talked about making data from their customers' accounts available to credit reporting bureaus. Orman's product, the Approved Card, has agreed to feed some transaction details to TransUnion. However, according to Robertson, TU doesn't yet have a way to factor that information into its credit scoring models.
FICO and other credit scoring algorithms measure how you manage your debt, assigning a grade based on factors like your credit utilization, the number of revolving accounts you maintain, and whether you've fallen behind on any of your bills. Credit scores don't calculate whether you're on time with your rent every month, or whether you've paid your cable bill reliably. Yet, if any of those debts fall into collections, they'll show up on your credit profile, with disastrous results.
Still, at least one major prepaid debit card issuer has found a way to translate responsible transaction history into unsecured credit. American Express (American Express is a CardRatings.com advertiser) caused a stir in the financial community when it launched a series of prepaid cards with no monthly fees. The American Express Prepaid Card links to your existing checking account, while Bluebird lets you reload your account with an employer's direct deposit or via retail "feeder packs."
Both cards include many of the same member perks as traditional AmEx charge cards, including purchase protection and global travel assistance. Through a program called "Make Your Move," American Express will monitor cardholders' cash management and spending patterns. Demonstrate good money management over the course of a year, and AmEx could override your credit score to qualify you for a standard Green Card with charge privileges.