E-wallets are going mainstream, and as more consumers buy in they should be questioning whether the technology could affect their credit score.
Consumers might not see an immediate parallel, but there are a few factors for mobile wallet users to consider. For one, the mobile wallet industry is still young, and the privacy and security of these systems are a work in progress. Also, mobile wallets make it easier to impulse shop, and the jury’s still out on whether such devices like Google Wallet and PayPal’s digital wallet could negatively impact one’s financial behavior. It’s a lot to take in, and given all the credit fraud going around, it’s a decision worth thinking through. So before you take a walk on the digital side, let’s examine two of the issues that you should watch out for.
Digital Privacy and Security
Perhaps the biggest drawback to joining the e-wallet revolution is the uncertainty surrounding it. A Pew survey released in April of 1,021 tech experts found that most of them predict “mobile payment systems” will go mainstream by 2020, though they largely agreed it would take several years for it to truly catch on, due to privacy concerns and the barriers to businesses adopting the systems. Yet some experts argue it could take even longer, because they believe those concerns about privacy and fraud are significant.
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Consumers remain wary of how secure their information is. And it’s no secret that hackers are working to find their way into consumers’ mobile wallets. For example, even as Google Wallet works to secure its network, third party researchers have hacked into the system, according to American Banker. The same article notes that Androids are the most targeted for malware, which can also expose users to greater risk of fraud.
Hacking and malware aside, a study by Symantec earlier this year highlighted the risks of users’ plain old forgetfulness — the lost smartphone. The study found that 96 percent of people who picked up lost phones tried to access personal or business data on the device. And 43 percent tried to access an online banking app. And an unprotected mobile wallet could serve as an easy entry into the financial life of someone who’s lost their phone.
Another issue to consider is how the e-wallet will impact your spending. Not everyone can restrain themselves when presented with a flurry of push notifications soliciting the latest free coffee or daily deal on their smartphone. With PayPal’s digital wallet, for example, users’ habits are monitored to help the service customize its referrals. But while that’s great for finding deals on products you might want to buy, the pitfall lies in how easy it is to spend when really thinking. Or in the store. All your credit information is tied to the wallet, so you can order a mocha from across the street at Starbucks and forget about it. You might even schedule a service, and forget that, too. The problem is that it might not feel like you’re spending all that much, but you will be because it’s so easy to do. And as Credit.com personal finance expert Gerri Detweiler points out, your score could be hurt by the high balance on your card.
What Your Credit Score Shows
Despite the concerns outlined above, there is good news for those interested in taking e-wallets for a spin. If the user sticks to their budget, and their data isn’t compromised and used for fraud, using the wallet won’t directly influence their credit score.
Credit bureaus can’t tell when you’re using a mobile wallet to make your purchases, just like they can’t tell whether someone is swiping your credit card or punching in its number, said the experts we spoke with. The same goes for credit scoring models that calculate your credit score.
“The credit report only includes information about your balances, debt and payment history. How you pay for purchases doesn’t change that,” said Detweiller. What’s more, “when a credit card balance appears on a credit report, it doesn’t indicate whether those charges were made online or in store or by mobile wallet,” noted Barry Paperno, Credit.com’s credit scoring expert. “Credit reports don’t reflect the manner in which transactions are made, i.e. online vs. in store vs. wallet, and the credit scoring formulas only access what’s on a credit report.”
With this in mind, the only thing you have to lose is … well, everything and nothing. Until the technology’s widely adopted, fortunately the choice will be yours.
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Image: Vernon Chan, via Flickr