Russell Simmons is into music, fashion, theatre, politics and money….your money. But can his prepaid cash card really improve your finances?
Millions of Americans don’t have a checking or savings account. That makes it a whole lot harder and more expensive to do simple financial tasks, like paying the bills.
About a year ago, hip hop mogul Russell Simmons decided there should be an easier way to improve the financial lives of those in struggle and invented the Rush Card. In less than one year, a quarter of a million people own one.
It all started with cell phones.
“I looked at the phone card business and realized it was a terrible predatory practice,” Simmons says.
When he started his mobile phone business, Simmons realized some of his customers had no easy way to pay the bill.
“There had to be a smarter way to serve those people,” Simmons says.
Which is how Simmons, whose success with Def Jam entertainment and Phat Fashion businesses is legendary, started preaching the basics of personal finance.
“It’s about access and convenience,” says Craig Marshall, Unirush.
In this hip hop world of music and money, cash is king. As many as 70 million Americans don’t have access to checking or savings accounts, credit cards or debit cards. That makes it tough to participate in an increasingly cashless society.
“You get a check. You go to the check cashing place and you pay as much as 20 percent to cash your check. Then you take your cash and you spend an average of 8 to 12 hours per week paying your bills. And then you’re denied access to hotels, to car rentals, to the internet to basically the American dream,” Simmons says.
Simmons answer was to create the Rush Card, a stored value card that acts like a debit card attached to a checking account. You put cash onto the card by directly depositing your paycheck or going to a money gram location. Then, you can use the card anywhere in the world a Visa credit card is accepted.
Stored value cards are such a hot concept that many companies, from McDonald’s to Jackson Hewitt are offering them as an alternative to credit cards or cash. The problem is, stored value cards like the Rush Card don’t improve your credit history and score and they aren’t free.
Applying for the Rush Card is free. But once you put money on the card, the company deducts a $19.95 activation fee. Then there’s a transaction fee.
“So if you go shop at a restaurant and it’s $30, we would charge you $31. That’s capped at 10 transactions per month. So that means you can only be charged $10 per month,” Marshall says.
But if you get cash off the card at an ATM machine, it’ll cost you a minimum of a $1.50 or maybe twice that. Those fees add up.
“I think it’s very important that they be disclosed and the consumers be aware of what those fees are and what it’s costing them to use those cards,” says Michael Moskow, Federal Reserve Bank of Chicago.
But the fees don’t seem to matter when you’re saving time and money.
“Do you find you’re saving time with it?”
“A whole lot of time. I can just go to my phone or my computers or pick up the phone and say I want to make a payment. This is my number. This is how much I want to pay. As opposed to going to the post office, writing out checks, mailing it out and waiting for them to take the money out of the checking account,” says John Anderson, a Rush Card user.
“Take your credit cards out of your pocket. Eliminate your debit cards and credit cards and try to survive in this world. What our card does is provide them access to a world that they’ve been locked out of,” Marshall says.
“Other people who have greater resources have greater opportunities and I think that’s wrong. We need to reverse that for those that are in struggle,” Simmons says.
For more information, go to www.rushcard.com
More from Michael Moskow, President of the Federal Reserve Bank of Chicago, on stored value cards like the Rush Card:
“We would like all Americans to have bank accounts. We think by being part of the formal banking system they get many benefits, like savings, checking, loans. but stored value cards are one option that consumers who do not have a relationship with formal banking institutions can use. So, I think it’s a good first step,” Moskow said.
“For a consumer who doesn’t have a bank account, you’d be carrying cash around in (your) pocket. That’s not a good thing to do. The stored value card has more security than carrying cash around and it enables the person to start spending according to a budget as well,” he added. “Some of these cards, and they vary, but some of these cards actually can build up your credit history by using the card and making payments from the card….So, there is a record of your payments, and that would give you some indication of your credit. ”
Moskow said that consumers should remember that there is a commercial bank backing up every stored value card. When choosing a card, you should investigate the commercial bank behind it.
“That’s the real security behind it. Some of these cards operate through credit card networks, too, like Visa or MasterCard,” he noted.
“If I were a consumer interested in this, I would compare fees, I’d try to get as much information as possible on the fees for the various alternative stored value cards. Then, make a decision based on which fee structure is best for you,” Moskow.
Some consumer groups have raised questions about how high the fees are for stored value cards. They have suggested that stored value cards might be considered predatory.
Moskow said stored value cards aren’t credit cards, and you’re not borrowing money when you use them. Then, he added, “you have to think about what is the level of charges for a consumer that would be considered predatory.”
“I would encourage consumers to move as quickly as possible to a regular bank account and push the edges of the envelope and sort of break down the barrier of walking through those doors to open an account at a commercial bank,” Moskow said.
For more information on this week’s free Money$mart week program, log onto www.chicagofed.org.
May 12, 2004.