Bad debit cards are not the answer to bad FICO scores
At first glance this seems totally weird, for two reasons. First, debit cards by construction have no ability to go below zero, so they are not directly relevant to the concept of credit, which is by definition when you borrow something and then hopefully pay it back. Second, my first, second, and third intuitive response to credit bureaus is to give them less information, not more. I already think they have way too much data about us. Their recent foray into using social media data is super creepy, for example, and threatens the “no outdated information” rule of the Fair Credit Act, for example.
I watched Orman explain her reasoning about her card, which I believe launched in 2012, and I kind of get her points about why she thinks this is a good idea (even though she clearly has a conflict of interest here): some people have trouble with credit cards, and for that reason they should use debit cards or cash, but cash has no data trail and thus people who are in only cash can never improve their credit scores enough to qualify for things like mortgages and car loans, which they may well be able to handle.
Here’s the thing, though. Her card actually has bad terms, and loads of fees, and it doesn’t look like FICO is actually going to use data from her cards to build peoples’ credit scores after all. Oh well.
Here’s an idea, which is not original at all but hasn’t gotten momentum because it doesn’t make bankers money: instead of shitty and expensive debit cards, let’s have the Post Office open a national bank and let people put money for free on their phones. Systems like this already exist in Kenya (Matt Stoller calls it a “M-Pesa style mobile cash system” in this fine post about the Post Office Bank idea) and in Ghana, and they work great, and let me once again mention there are no fees. It’s a free service as long as you have a cell phone, and it certainly doesn’t have to be a fancy smart phone.
In the short term, such a system will free poor people from getting ever increasingly ripped off by banks and companies with their crappy pre-paid debit cards. It might not give them stellar credit scores, but I’d argue that it’d still be an improvement.
In the asymptotic limit of that system, we’d have a pretty sharp division between people who live in the world of credit, with good FICO scores, and people who deal in cash and mobile cash, with bad or nonexistent FICO scores. It would be hard to get a good mortgage or car loan if you are in the latter group, but that’s already true (unless you count the kind of mortgages Wells Fargo gave to minorities to rip them off).
In the longer term, if we wanted to give credit scores to people who deal in cash, we could use their mobile cash records to deem their spending habits “credit worthy”.
In the much longer term, it would be great if we stopped pretending (I’m looking at you Suze Orman) that having a bad FICO score is a moral failing: it’s really mostly a sign of being broke. If we want to help people get out of debt spirals, then let’s talk about a Basic Guaranteed Income.