My philosophy on banking is very simple: You shouldn't have to pay money to access your money.
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That's why I get a bit annoyed (OK, a lot) when I see aggressive marketing campaigns for celebrity-endorsed prepaid cards -- these loadable pieces of plastic targeting consumers who may not have access to a traditional bank account. Yes, they offer some convenience for the 25% of Americans who are unbanked or underbanked. But in exchange, prepaid cards charge exorbitant fees. Why not just educate people on how to bank smart and avoid fees through the use of fee-free FDIC-insured banks and credit unions? They do exist.
Lately these cards have been all abuzz. Earlier this year the teen-marketed Kardashian Kard came under criticism (including mine) for its "predatory" fees; shortly after the famous sisters -- whom the card was branded after -- abandoned the deal.
Now another celebrity's fee-laden prepaid card is making headlines: Russell Simmons' RushCard, a prepaid Visa debit card, which he launched in 2003. (To be fair, Simmons is not just slapping his name on the card like the Kardashians; he's an investor who says he pioneered the prepaid card space.)
The RushCard monthly plan costs $9.95 per month, has a one-time activation fee of $3.95 to $14.95 (depending on which type of card you choose), and a $2.50 ATM withdrawal fee (after using up your two free withdrawals per month). It's pretty much in line with the norm for these types of cards; a recent Consumers Union survey found that one-time activation fees ran about $10 for prepaid cards, and monthly fees also cost about $10.
The RushCard's not new, but the media mogul and entrepreneur -- whom I actually admire -- just appeared in a Forbes.com video defending the card against critics, saying it creates financial freedom for the underbanked. Simmons also pointed out that he wants to broaden the card's reach to go beyond the underbanked and target the "middle class" consumer that, he says, "banks don't want."
Really? Banks don't want us?
I hit the replay button on the interview more than once and found that a few of Simmons' remarks were questionable. I understand that the card offers some immediate convenience and is a lower cost solution to check-cashing, but is the best place to store your money? Is it really a long-term solution to establishing financial freedom, as Simmons insists? At the time this article first went to press I was unable to reach Simmons for comment, though shortly after, he and I spoke for nearly an hour. It's clear Simmons is passionate about his business, but I'm not convinced the RushCard is the end all for underbanked Americans.
'The RushCard builds credit.'
In the Forbes interview Simmons says the RushCard helps consumers build credit. It's true that the company reports your payment history for things like rent, utilities and other bills to LexisNexis and PRBC, a national credit reporting agency. But that doesn't necessarily mean your credit score will improve. Your traditional FICO credit score -- the score that most banks and lenders use to evaluate borrowers and decide loan terms -- is only based on your credit activity as tracked by Experian, Equifax and TransUnion.
The Web site for RushCard states, "the credit reporting agencies we report to use your transaction history to create a positive credit file for you. When you apply for credit, lenders may use your positive credit file to qualify you and offer you lower interest rates." That "may" indeed be true, but most lenders will just look at your FICO score, which neither of these reporting agencies influence. Simmons defended the credit building aspect of the RushCard by telling me his average customer wouldn't be able to build credit otherwise. They're going from no credit to some credit, which is an improvement, he says. His hope is that eventually consumers will be able to qualify for a credit card and build a proper credit history and score that way.
I should say that PRBC does work with FICO to crunch the FICO Expansion Score, an alternative score for borrowers -- mainly subprime borrowers -- with little to no credit history. But, again, most lenders want to work with credit-worthy borrowers with a history of timely payments using a variety of different credit. If you're underbanked and you want to establish and build credit, I would argue you're much better off doing so with a secured card. Your payment activity with a legitimate secured card gets reported to the major credit reporting bureaus and that in turn impacts your FICO score.
'The RushCard is a cheaper alternative to a bank account.'
In the video Simmons says his RushCard is actually "half the price of a Bank of America Free Checking Account." When we spoke, he supported that argument by citing a J.P. Morgan survey showing that a BofA checking account costs customers an average $551 per year in fees, while the RushCard would cost $259 a year. I saw the survey. He has a point. But I have a traditional Bank of America checking account and I can't remember ever paying a fee just to have access to my money. Yes, the bank has plenty of fees for out-of-network ATM withdrawals, transferring money outside the bank and overdraft protection -- and the J.P. Morgan survey assumes you're incurring one overdraft fee a month, plus one out-of-network ATM fee. (It assumes RushCard users make eight purchases a month, and have 1.5 ATM withdrawals.) But if you're a conscious and educated banker, you won't fall into those traps. I can find my bank's closest ATMs using its free mobile application, which helps me avoid fees, and I've opted out of overdraft protection, which normally runs about $35 each time you bounce a check or overdraft your account.
It's also true that some BofA accounts require a minimum monthly balance to avoid a fee. But that's easily avoidable, too, as long as you keep tabs on spending. And, hey, if you can't maintain a minimum balance shop around for a bank that's more flexible. They're out there.
'Those who criticize the card for its fees are uneducated.'
"It's very inexpensive," says Simmons in the video. Well, maybe if you're comparing it to the old Kardashian Kard or check-cashing services. You can view the card's schedule of fees here. I only have a masters degree myself, but I think paying $9.95 a month just to store my money on a card is not necessarily the best option.
'Banks won't let in 60 million consumers.'
Simmons is referring to the 60 million unbanked or underbanked Americans, as polled by the FDIC in 2009. But to interpret this as "banks don't want you" seems like a gross overstatement. Simmons later tells me his customers -- many who live paycheck to paycheck -- simply can't get conventional bank accounts. "Banks either refuse them any access or drop them because they're too small, perceived as too risky or both. It's not like they're not trying," he says. But -- again -- what about credit unions and local banks? Since the 1980s these community-oriented institutions have been offering matched savings programs to low-income families. Few charge minimum balance fees and many reimburse your for ATM withdrawals. Check out Bankrate.com and FindaCreditUnion.com to find a bank or credit union near you.
Bottom line: Simmons and I both agree that consumers deserve more choice -- and that when compared to check-cashing services, the RushCard is a far more affordable alternative. We're both big on financial literacy. But I just don't agree that consumers -- namely the paycheck-to-paycheck consumers using the RushCard -- ought to go cold turkey on traditional banking solutions, especially when there are still so many options with avoidable fees.