What looks like a credit card, acts like a credit card, but doesn’t do anything for your credit history?
If you guess “stored value card,” you’re tuned into the latest craze in the financial community.
A stored value card, which is also known as a prepaid debit card, looks like a regular credit card. It typically has a Visa or MasterCard logo on the front, along with the cardholder’s name, number and expiration date. There is even a place to sign on the back of the card.
But instead of acting like a credit card, where you use the credit card company’s money to purchase goods and services and pay them back at the end of the month, a stored value card acts like a debit card attached to a checking account — except there is no checking account.
Instead, you put cash onto the card in a variety of ways, either by direct depositing your paycheck, sending in a different check, or, going to a MoneyGram location. Once the card is “loaded,” you can go anywhere a regular credit card would be accepted and use your stored value card exactly the same way.
Even better, you can use a stored value card on the Internet, which allows cardholders to pay bills online.
In recent years, high-profile entertainers and sports figures like hip hop mogul Russell Simmons and former basketball star Magic Johnson have joined forces with commercial banks to offer stored value cards. They’re aiming for the paychecks of millions of minority and immigrant families who are not part of the formal banking system.
Other companies are offering them, too. Pre-paid phone cards are a form of stored value cards. McDonald’s and Starbucks have started offering prepaid debit cards as another means of paying for meals and drinks. Commercial tax preparers are offering to place your refund from the IRS on a stored value card instead of getting a refund check. Companies that use stored value cards in place of payroll checks can cut the cost of processing payroll by up to 75 percent.
There are countless ideas for stored value cards, according to Tom Miezejeski, an analyst with the Raritan, N.J.-based Pelorus Group, which projects that the prepaid debit card market will grow from 6.3 million in 2002 to 38.7 million in 2007.
As many as 70 million Americans do not have bank accounts or credit cards. Another 40 percent of those Americans who do own credit cards don’t use them the way they should.
“They’re almost maxed out on the credit line. When that happens, these people, who could deal with reputable card issuers, get involved with late payment fees, over-line charges and end up paying anywhere from 15 to 25 percent on an annual basis,” Miezejeski explains.
Although McDonald’s and Starbucks don’t charge for their stored value cards, Russell Simmons and Magic Johnson do. Russell Simmons RushCard charges a $19.95 activation fee and then a dollar for every transaction up to $10 per month.
“If you spend $30 at a restaurant, we charge them $31,” explains Craig Marshall, COO of Rush Communications, who says that nearly a quarter million customers signed up for Rush Cards in the first year, and the company is issuing cards at the rate of 30,000 to 60,000 per month.
In addition, customers are charged a minimum of $1.50 by the company to use an ATM card. The bank that owns the ATM machine may also charge a fee. That means customers could be charged as much as $4 for each ATM transaction.
It’s the fees that stored value card companies charge that have some consumer activists crying foul. Miezejeski disagrees.
“If you were a person who was within 5 percent of your credit line, you’d incur $500 per year in fees between the interest and over-line charges. But if you have a stored value card, where you can’t get charged over-line fees, interest or late fees, you’re doing better” Miezejeski notes.
“The reason we put this fee system in place is that our customers want the convenience of the account, but they might only use the card once or twice a month. They can put it in a drawer if they need to rent a car or reserve a hotel room or purchase a plane flight, and they’re not getting hit on monthly (with a fee),” Marshall says.
Marshall says a stored value card also compares favorably with the kind of checking accounts his customers would be able to get.
“Every bank that offers this particular group a ‘free’ checking account expects them to bounce 3 checks per month so they can charge them $30 per check,” Marshall explains. “The average customer will spend $400 to $500 to maintain their checking account. The Rush Card helps them avoid that cycle.”
Although stored value cards do not normally report financial transactions to credit reporting bureaus, Marshall said the Rush Card has been looking into ways it can report financial information to help establish a good credit history for its customers.
“We have also been working with Fair Isaacs to be able to report their credit scores quarterly, without that having a negative impact on their credit history,” he offers.
“We want to provide a lot of financial literacy information to our customers,” says Russell Simmons. “We also want to help people buy their first houses. We want to build out a whole financial services company that maybe loans you money for less than 1,000 percent, which is a pretty reasonably rate for those who loan you money until the end of the week.”
“There are so many practices that prey on the poor,” Simmons continues. “And there’s so many of those people who earn a salary, and are a bit short or have made some mistakes, but they can’t get out of struggle because they don’t have the opportunity. This allows them opportunity.”
CORRECTION: In a recent column I wrote that lead was used regularly in paint until the late 1980s. I should have written late 1970s. Dean Dakin, a reader in Portland, Maine, wrote to point out that the U.S. Consumer Product Safety Commission banned the use of lead paint in 1978.