American Express and the Prepaid Way to Credit Cards

Via MainStreet.com’s Jeanine Skowronski we learn that American Express has done a major upgrade to its prepaid cards that could be hugely beneficial to Americans with lower credit scores. Citing an AmEx executive, Skowronski tells us that the credit card company would allow prepaid users with good track records to eventually upgrade to a charge card, which would be the first such program.

What makes American Express’ move so unique is that in effect the issuer will be sidestepping the credit reporting agencies in its underwriting process, instead relying exclusively on its own internal data. I have to admit to being somewhat hesitant to fully accept the story without corroborating it. And sure enough, I was able to do just that on AmEx’s own website. The new program is called Make Your Move and does indeed offer a prepaid way to a charge card. Let’s take a look.

Prepaid the American Express Way

We reviewed the American Express prepaid card when it was launched in June of last year and pronounced it “a surprisingly consumer-friendly product.” It was arguably the best prepaid card in the U.S. even before this upgrade. Now there can no longer be any doubt about it.

What makes AmEx’s prepaid card so good is that it is free of any monthly fees. The only usage charge is a $2 ATM fee, assessed if you exceed your limit of one free withdrawal per month. The only downside of the card is that AmEx doesn’t have its own ATM network, which means that the ATM operators will charge AmEx cardholders a separate fee for each withdrawal (the first one very much included). Still, if you could keep your ATM withdrawals to one or two a month, you would be getting a truly good card at a very reasonable cost.

And now you’d be getting much more. For one thing, AmEx has enabled cardholders to load their paychecks onto their cards via direct deposits, up to a maximum of $5,000 a month – a feature typically associated with checking accounts. That being said, Skowronski is incorrect when she calls the product a “prepaid debit card.” AmEx’s is not a debit card, because it doesn’t link to a checking account. If it did, the cardholder would have been able to write checks, which is not an option here. AmEx has also increased the ATM withdrawal limit from $200 to $400. But the biggest news by far is the Make Your Move program and it’s about time we took a look at it.

Make Your Move

Here is how American Express describes its new prepaid-to-credit program:

Your American Express Prepaid Card can help you build a history with American Express through Make Your Move. All you need to do is load and use your Prepaid Card regularly and you may be invited to apply for an American Express Charge Card.

In effect, what American Express is doing is creating its own credit bureau. Here is how that will work:

Using the American Express Prepaid Card does not impact your credit score. With Make Your Move, you will be building a history with American Express, but no information will be passed to the credit bureaus and your credit score will not be impacted. Make Your Move and using your Prepaid Card will not re-build or affect a poor credit history. However, if you apply for an American Express Charge Card, American Express will check your credit history with the credit bureaus as part of the application process. Please note, an application for the Charge Card does not guarantee approval.

So AmEx’s prepaid card could give Americans who are shut out of the credit system a legitimate way to get back into it, without having to wait for years for all the bad stuff that is on their credit reports to go away. Now, I don’t expect that AmEx would give a charge card to someone with a real bad credit history, nor do they say that they would. But it seems like everyone else has a real good chance.

AmEx is hedging its bets by using a charge card as a reward for good financial behavior, not a full-fledged credit card. What’s the difference? Well, a charge card’s outstanding balance must be paid in full at the end of each monthly cycle, so you can’t carry any of it over to the next month. However, credit reporting agencies keep track of your charge card activity, which means that it does affect your credit score.

The Takeaway

American Express’ Make Your Move is the only program I know of that gives Americans with sub-par credit scores a fighting chance to get back into the financial system. A charge card, if used prudently, would help them build up their credit scores quicker than they otherwise could. So if you are one of the millions of Americans who are relying on prepaid cards, because no other type of payment card is available to you, you may want to consider giving American Express a try. Unless you do multiple ATM withdrawals each month, it is very likely that this would be your best option.

However, if you are not shut out of the system and have access to checking accounts and credit cards, you should still stick to them, as they easily beat even the best prepaid card out there.

Image credit: American Express.