As unfortunate as it may be, many of one's financial opportunities in life depend on a number: the FICO score. Credit affects us all when seeking a mortgage, car loan, or credit card, one's FICO score can make all the difference in the world. The FICO score is used by creditors to determine one's ability and likelihood to pay back debt; thus, due to the increased interest rates associated with less-than-perfect credit, those three digit numbers have the potential to make a reasonable $250 car payment soar to a less-manageable $400.
A low credit score can restrict one's credit options, leading to cash advance and payday loan reliance, especially when considering that most payday loans are borrowed to cover recurrent expenses, such as credit card bills and car payments.
One often underutilized option for those with low credit scores are prepaid, secured credit cards. These cards work much like a bank account but with the added benefit of helping to reestablish good credit. An individual pays money into a credit account, which he/she can then access much like any credit card: though secured with a deposit, purchases are loaned to the buyer, as the deposit is only a portion of the credit limit. Though prepaid by the consumer, the card builds credit as it is reported to credit institutions. In contrast, regular prepaid credit cards (not secured credit cards) do not build credit as the entire credit limit is deposited by the card holder.
Earlier this year, a study conducted by a team of Harvard and Oxford Business School Professors revealed that prepaid credit cards with easily accessible saving features help to reduce payday loan and pawn shop reliance. The D2D fund study designed a new savings feature on the UPside Visa prepaid credit card, including a mobile app with saving pop-up reminders when account withdrawals are made, which encourage individuals to easily put away money for unexpected expenses. They call the feature the "rainy day reserve" and created it the intention of helping consumers improve their finances by establishing savings accounts. People without savings accounts are far more likely to patronize payday loan services; thereby, the new feature may reduce payday advance reliance.
The initial results of the study seem to support this assertion as well. Nearly half of the prepaid card holders reviewed in the study stated that they would use the feature because of the ease of use. Even more telling, a whopping 79 % of the user admitted that the feature has already helped them to save money. It appears that the reminders installed in the mobile app are encouraging card users to hold onto their funds.
Having a saving account is essential to good financial health. Everybody faces unexpected emergencies in life, and having a safety net is the first step towards financial independence. Those with low credit scores are particularly susceptible to trying financial circumstances, and they have fewer options when crises arise. Developing smart saving habits by using prepaid credit card features, such as the "rainy day reserve," may help protect the financially fragile when faced with unnecessary expenses and hardships. While payday advances can provide instant relief, they are costly alternatives that should only be used in cases of emergency. Clearly, it is wiser to plan ahead, save, and avoid a trip to the payday loan office.